ML18092B468

Philadelphia Electric Co,1986 Annual Rept.

ML18092B468
Person / Time
Site:	Salem, Hope Creek, Limerick, 05000000
Issue date:	12/31/1986
From:	AUSTIN J H, EVERETT J L PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
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ML18092B463	List: ML18092B462 ML18092B465 ML18092B466 ML18092B468 ML18092B469
References
NUDOCS 8703200022
Download: ML18092B468 (48)

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Philadelphia Electric Company Annual Report 1 986 F inan ci a l H i ghl i gh ts Operating Revenue Op e rating Expenses Taxes Charged to Operations Operat i ng Income Earnings Applicable to Common Stock Earnings per Average Common Share C ash Divid e nd s Paid per Common Shar e Av e rage Shares of Common Stock Outstanding Constmction Expenditures Tota l Assets Con t en ts L e tt e r to Shar e hold e rs R e port of 1986 Operation s 1986 $3,090,869

, 000 $2 , 525,859,000

$521 , 557,000 $565,010,000

$475 , 359,000 $2.60 $2.20 183,140,767

$966,500,000

$10, 7 48,020,000 1985 %Change 52 , 9 4 5 , 1 7 5 , 000 5% S2 , 532 , 670 , 000 S 44 0 , 862 , 000 18% S4 l 2,505 , 000 37% S 4 3 4 , 72 4 , 000 9% S2.56 2% S 2.20 169 , 7 8 4 , 471 8% S864 , 7 00 , 000 12% S l0 , 011,845 , 000 7% 2 5 Mana ge m e nt's Di sc u ss ion and Anal ys i s of Finan c ial C ondition and R es ult s of Operation s 21 C on so lidated Finan c ial Stat e m e nt s 23 N ot es to Finan c ial Stat e m e nt s 28 R e port of Ind e p e ndent C e rtifi e d Public Ac c ountant s 38 Sec ur i ti es, Finan c ial and Operating S tati s ti cs 39 Shar e hold e r Information 44 Offi ce rs and Dir ec tors 45 EARNINGS AND DIVIDENDS PER SHARE Dollar.; 3.0 0 --2.50 -2.00-l.50 1.00 -:so >-f---f--82 8 3 8 4 85 86 -Earnings Per Share -Dividends CONSTRUCTION EXPENDITURES Million ------Dollar.; 1200 1000 800 60 0 8 2 8 3 8 4 85 86 External Sources Internal Sources 0 To Our Shareholders We are pleased to report that 1986 was a yea r of great progress for Philadelphia E l ect ric Co mpan y. Highlights for th e year included the following: 0 Limerick U nit No. 1 was placed into commercial operation on Februar y I , 1986. For its eleven month s of commercial operation during 1986 , the unit perform e d flawlessly , ac hi evi ng a capacity factor of 81 %. On Januar y 26 , 198 7 , U nit No. 1 set a n ew world record for performance of a large powe r reactor during its first fuel cycle , after operating continuousl y for 198 days until the unit was removed from seivice for minor repa i rs. 0 The Company was authorized an ann u al elec t ric rate increase of S 351 million , the largest in the Company's history , as we p l aced S3.8 bi lli on of Limerick U nit No. 1 and associated common plant into se ivice. 0 To moderate the impact of the Limerick rate incr ease on customers , the Company will phase in the incre ase over a three-yea r period in eq ual a mounts of 4 .8% per yea r. Despite the increase , typical customers' December 1 986 e lectric bills were lower than those for December 1985 , due to r ed uced fuel costs. 0 Limerick Unit o. 2 construction proceeded ahead of schedule , and 1986 expenditures were with in the planned expe nditur es of th e cons tru ction cost cap of 5 3 .19 7 billion. 0 The exce llent performance of our nuclear plants r es ult e d in approximately

$400 million of fuel sav ing s for 1986. 0 Earnings per share amounted to S2.60 , an increase of four ce nts p e r s hare fr om a year ago. 0 Electric sa les were up 3% compared with last yea r , refl ec ting m ore customers , an improv ed r es identi a l housing market and favorable weather in 198 6. Gas sold an d tran spo rted declin e d due almost entirely to th e reduction in gas tran spo rt e d for others. 0 Rates for natural gas were reduc ed b y approximately S47 milli o n , reflecting prudent purchas es of gas from suppliers and reductions in pipelin e suppliers' rates. O The Pennsylvania Supreme Court denied requests for an appeal of the decision of the Commonwealth Court , affirming an order of the Court of Common Pleas of Bucks Co unt y which directed the completion of the Point Pleasant Project. This deci sio n clears the way for construction to resum e in 198 7. 0 The Com pan y so ld its s t eam h eat sys tem for S3 0 million inJanuar y 1 987. For m a ny years , Phi lade! phia E lectric Co mpan y has h a d both a formal Mission Statement and Corporate Commitments.

During 1986 , we reexamin e d and modifi ed them to b e tter reflect current circumstances.

To help achieve our Corporate Commi tmen ts and deal with current critical i ss u es , each year we establish specific goals at both the corporate and departmental levels. This annual report present s our new Mission Statement, the Corporate Commitments and specific Critical Issues which chart th e course that o u r Company has set. This report's photography depicts several aspects of our Corporate Commitments. As we look ahead to 1 987 and beyond , we w ill be addressing th ese key C ritic al I ss u es; they a re ( 1) completing Limerick U nit No. 2 on time and within budget; (2) ac hi ev ing standa rd s of exce ll ence in o ur nucl ear o perati o n s; (3) o perating and maintaining o ur base-load generat i on capa cit y to ac hie ve a high l eve l of performance

(4) adapting to changing compet iti ve forces wit hin our industry; and (5) achieving public recognition as a caring , responsive a nd effi ci e nt o rganization. We cont inue to appreciate the s upport of o ur inv estors and pledge our every effo rt to achieve o ur Co rporat e Co mmitm e n ts for th e genuine benefit of our inv estors , our customers a nd our fellow employees. James L. Everett C hairman of the Board and C hief Executive Officer John H. A u s tin , Jr. Pr esiden t and Chief Operating Officer Jam es L. Everett John H. Austin , Jr.

Commitment to our Customers PE is co mmitt ed to providing safe, reliable and econom i cal utilit y serv i ce to our customers. We will b e responsive to the ir needs and courteous in all our public contacts.

Gas Operations personnel inspect the liquified natural gas (LNG) vap orizers and storage tank at the West Conshohocken Gas Plant. During periods of heav y demand i n the winter, the vaporize rs are used to convert the LNG to natural gas to supplement regul ar pipeline supplies.

1986 f INANCIAL REVIEW EARNINGS RISE Earnings per share of common stock in 1986 amounted to S2.60, a 2% increase from the S 2.56 earned in 1985 , wh il e the average number of s har es outstanding incr eased 8% to 18 3 million shares. Total common s tock ea rnings amo unt ed to S475 million , up S4 I million or 9% from a yea r ago. The improvement in p er s h are earn ing s r esulted from incr eased e l ectric base r ates and impro ved electric sales. Earnings for I 986 were r e du ce d approximately seven cents per s h a r e as a r es ult of a S26 million Pennsylvania Public Utility Co mmi ssio n (PUC) disallowance for fuel and other co sts , while th e comparable disallow ance r educed I985 earnings by 2 3 cents per share. F ull financi a l statements and not es begin on pag e 23. Information o n sa l es , revenue , expenses and customers can be found on pages 2 I , 22, 23 , 42 and 43. NEW FINANCINGS COMPLETED The Company raised over SI. I billion in new capital in 1986 to provide for c o nstruction , debt retirements and other needs , as summarized in the table on page 6. Si nce inter est r ates remained at Richard G. Webster (l eft}, Construction Div i sion , and Raymond F. Holman (righ t), Vice President, General Administration, review the progress of construction on the Merrill Creek Reservoir near Phillipsburg, New jersey. They are standing on the foundation for the central core of the embankm ent dam which will be construct ed in 1987. low levels during the year , PE continued to repurchase its outstanding high interest rate bond issues and to refinance those issues at the existing lower rates. A total of S 4 6.9 million of the I 7 Ys% mortgage bonds due 2011 were called for redemption on July I. This completed the retirement of the entire SI 2 5 million issue , which began with a tender offer in November I985. Likewise , S 4 8.9 million of the I8}:1% mortgage bonds due 2009 were redeemed on September I 5 , completing the retirement of this Sl25 million issue, also begun with a November I985 tender offer. Through a November I 986 tender offer , the Company repurchased S76.9 million of its S 100 million of 15'}8% mortgage bonds due 2010. This repurchase and early retirement , as well as the two calls discussed above, enabled PE to reduce annual interest payments by approximately S I8 million.

Workmen guide the steam dryer assembly for Limerick Unit No. 2 as it is lowered into the reactor vessel. This 40-ton , st ainless steel assembly is about 19 feet high and 20 feet i n diameter. The dr y er removes mo isture from the steam before the steam is fed i nto the turbines to generate electricity. 19 86 MAJOR FINANCINGS Mon th Fe b. Debentures

-1 O M!% Series due 1996 Mar. Sinking Fund Debentures

-l 1%Seriesdue 2011 May Debentures

-9.85% Private Placement due 1 993 May Sin kin g Fund Debentures

-10.05% Private Placement due 1998 May Co mm on Stock -3,000 , 000 Sha r es Millions o f Dollars 100.0 350.0 25 0 62.0 LIMERICK CREDIT AGREEMENT REPAID During 1986 , the Company repaid in advance of maturity the entire SSSO million balance under the Limerick Credit Agreement. This revolving credit/term loan agreement with a group of 26 banks was used to finance the costs associated with completing Limerick Unit o. 1 and common plant. By using the Limerick Credit Agreement from 1984 to 1986 and refinancing at favorable rates , the Company was able to realize substantial interest savings. Annual interest costs wou ld h ave been approximately S 30 million more had long-term debt been sold at that time to finance Limerick.

LIMERICK UNIT NO. I RATE INCREASE GRANTED On June 26 , the PUC adop t ed , by a two-to-one vote , a final order granting the Company an annual net increase in revenue of S351 million. The order reflects an overall rate of r eturn of 12.26% and a return on equity of @ 517.79 53.4 14.75%. The increase will be phased in over a three-year period in equal June P o lluti o n Co ntr ol Bonds -8'Ys% du e 2016 34 .o steps of approximately 4 .8% per year , Sept. Pr efe rr ed S t ock -9. 50%, 1 986 Se ri es; 750 , 000 followed by a three-year p eriod for recovery , without interest , of delayed shares@ S 1 00 75.0 billings under the phase-in plan. Oc t. Mortgage Bo n ds -10 14% A major issue in the proceeding Se ri es du e 2016 150.0 involved determining the additional Oct. Mortgage Bonds -8¥<% Se ri es due 1994 Jan. Common Stock Purchase Dec. Plans: Dividend R ei n vest m e nt , Emp l oyee , PAY SO P-5 , 399,000 Shares; Average Pri ce of $21.07 Co mm on Stock continuous offe rin gs: 3 , 000 , 000 S har es; Average Price of 100.0 113.8 $21.28 638 Total S l , 127.0 capital costs which were incurred as a result of construction delays in 1976 and 1978. The Commission asserted that it had previously determined that the delay decisions were imprudent.

The Company argued that the Commission had made no such determination and that , in any event , due to financial constraints and changes in the regulation and scope of the Limerick project over the construction period , no adjustment was warranted. Nevertheless , the Commission concluded that there should be a rate base reduction of S369 million for these delays. This resulted in a reduction of S80 million in annual revenue which will not be recovered from customers.

The Company has filed an appeal of this decision with the Commonwealth Court of Pennsylvania.

The PUC rejected various excess capacity contentions made by opposing parties and found that Limerick Unit No. 1 is needed to help meet the Company's capacity requirements.

The Commission followed precedent and denied the current recovery in revenue of the 50% of the common plant facilities associated with Limerick Unit No. 2. Although these facilities are in service today , the associated revenue cannot be recovered until Limerick Unit No. 2 is placed in service in 1990. Nevertheless , carrying charges equivalent to the allowance for funds used during construction are being accrued on 50% of the common plant facilities. CO NSTRUCTION INVESTMENTS MADE The Company invested S967 million in new plant and equipment in 1986 , including S 189 million of carrying charges equivalent to the a ll owance for funds used during construction.

Expenditures for 1987 are estimated at Sl.2 billion , including S527 million for Limerick Unit No. 2. STEAM SYSTEM SOLD On January 30 , 1987, the Company sold its steam heat system to Philade l phia Thermal Corporatio n fo r S30 millio n. The sale price is approxima t e l y eq u al to the net book value of t he facilities bei n g sold. Philadelphia Thermal acquired a ll of the production and distribution assets of the system which supplies steam to 4 50 customers in center city Philadelphia and areas of West Phi l adelphia thro u g h thirty-th ree miles of mains. The system has experienced declining sales over the past 13 years. Philade l phia Thermal is a who ll y owned subsidiary of Catalyst Thermal Energy Corporation which owns and operates steam heat sys t ems in Baltimore, St. Louis and Youngstown, Ohio. Catalyst Thermal is a s u bsid i ary of Catalyst Energy Development Corporation which has diversified holdings of over S 1. 2 billion in the energy field. The Penns ylva n ia-Ne w jerse yMa ry l a nd (P}M) Interconnec t ion pro v ides electr i c s er vi ce reliabil i t y at the lo we st possible cost fo r its e l e v en member companies , i nclud i n g PE. J a mes F. McLau g hl i n (sta nd i n g) a n d Al f re d A. Ga mb o n e (s eat ed) mon itor el e c t ric t r a n s m i s s i o n i n t h e PJM c ontrol room.

LIMERICK UPDATES LIMERICK HAS SUCCESSFUL FIRST YEAR In 1 9 8 6 , Lim e ri c k Ge n e rating S tation , th e Co mpan y's new stat e-o f-th e-art nucl e ar facilit y, continued to provide a n exe mplar y demonstration of nucl ea r power as a sa fe , reliable and e c o nomical source of energy. C ommercial operation of Lim e rick U nit No. 1 began on February 1. The unit's performance set a world r e cord for a large power reactor during it s first fuel cycle. After returning from a brief outage on July 13 , the plant ran c ontinuously for 198 da ys until a late J a nuar y 1 9 87 s hutdown for minor r e pair s. U nit No. 2 construction is proc e eding on schedule and e xpenditures continue to be within th e planned levels associated with the co n s truction cost cap of S 3 .197 billion. As of December 31 , the Co mpany had invested S 1.3 billion in Financial management visits the Philadelphia Stock Exchange and the PE trading specialist. (Left to right) Donald M. Stanton, trading specialist, chats with Morton W. Rimerman , Vice President, Finance and Accounting; Donald P. Scott, Treasurer; and Richard G. Gilmore, Senior Vice President, Finance. Unit No. 2, which was approximately 4 9% complete on a man-hour basis. POINT PLEASANT PROGRESSES One component of the planned supplemental cooling water system for Limerick is the Point Pleasant Water Project , which will divert allocated water from the Delaware River to the Schuylkill River. Construction has been suspended since 1984 , when it was approximately 30% complete.

The Point Pleasant Project has been the subject of substantial opposition from various groups , causing extensive litigation and the suspension of construction.

In MayandJune , the Supreme Court of Pennsylvania denied requests for an appeal of the decision of the Commonwealth Court , affirming an order of the Court of Common Pleas of Bucks County which directed the completion of the Point Pleasant Project. In October, a special master was appointed to oversee implementation of the Court of Common Pleas Order. Construction is expected to resume in 1987 , with completion expected in 1988. A PE securities prospectus is checked while on press by Joseph D. O'Loughlin (left), Financial Division, and Robert}. McNamee (right), financial printer. Commitment to our Investors PE is committed to be a financially strong institution, /,ooking at the long term and avoiding slwrt-term expedients.

We will continually evaluate financing alternatives to attract funds at advantageous rates, while providing protection against unreasonable business risks.

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PE is noted for its excellent em ploy e e trai ni ng pro gr a m s. Linemen-in-training work at the 25-foot level wit h en er gized conductors mid-way through the six-week line school program. Sufficient interim supplemental cooling water for 1986 was obtained for Limerick Unit o. 1. The Company has filed with the Delaware River Basin Commission (DRBC) for its 1987 supplemental cooling water needs , pending the availability of the water to be supplied from Point Pleasant. MERRILL CREEK CONSTRUCTION CONTINUES Construc ti on work on the Merrill Creek Project progressed we ll during 1986. The scheduled in-service date for this project is May 1988. Merrill Creek is a small tributary of the Delaware River which is being dammed to create a IS-billion-gallon reservoir near Phillipsburg , New Jersey , about SO mi l es north of Philadelphia.

The project is jointly owned by PE and six other electric utilities , all of which have been ordered by the DRBC to provide a water storage facility as a condition of their authorization to take water from the Delaware River for certain generating units , including Limerick.

The Merrill Creek reservoir, when comp l eted , will be filled with water pumped from the Delaware during times of high flow. Then, during flow or drought conditions , this stored water will be released to the Delaware to replace the water being evaporat ed in the operation of the owners' power plants. The project is expected to cost $217 million , of which the Company's share is S96 million. EXTENDING SERVICES , CAPACITY AND CAPABILITIES AREA DEVELOPMENT CONTINUES SUCCESSFULLY The economy of Southeastern Pennsylvania is expanding, and PE continues to aggressively promote Cardiopulmonary resuscitation (CPR) training has been given to more than 9,000 Company employees and has been effective in s u staining over 30 lives. PE Coordinator of the First Aid/CPR Program, William W. Hand, Safety Division, observes Barbara M. Federici, Personnel Administration Division, practicing CPR. Commitment to our Employees PE is committed to maintaining a highly skilled and dedicated workforce, commensurately co mpensated.

We will provide opportunities and incentives for employees to work productively to their full potential, in accord with the Corporate Equal Opportunity and Affi r mative Action Policy.

A tuition refund program for the successful completion of an approved course of study is offered to all employees.

Drexel University stud ents Lesle y L. Andres and Lawrence L. Middleton, both of Electric Production, are program participants.

Nearly 600 other PE employees aetended many different colleges and universities as part of the program in 1986. economic development within its territory.

Under the successful

" We Know the Territory" theme used in radio and print advertising , the Company publicizes the many geographical and economical advantages offered by the Greater Philadelphia metropolitan area. Aided by the strength of the economy and the success of Company promotional programs , PE's Area Development Department assisted 31 new firms to locate in the region in 1986 , thereby creating 2 , 200 new jobs. Also , PE participated in successful efforts to retain and expand 59 existing firms involving 8 , 600 jobs. Prospects for the area remain promising.

The number of jobs here is at an all-time high, and unemployment has fallen to its l owest level in recent years. Retail sales growth is among the highest in the nation. Commercial and residential development has reached record levels. In downtown Philadelphia alone , over 10 million square feet of new and rehabilitated office space is planned o r under construction.

The transition from a heavy manufacturing-based eco nom y to a light-industry and service-based economy has enabled the region served by the Company to become a leader in health care , pharmaceutical research , information processing and business services.

The local economy was bolstered even further in the fourth quarter of 1986 by Eastman Kodak's decision to locate its new Pharmaceutical Division Headquarters in Chester County. Initial employment of 300 to 500 people is expected , with full employment to reach approximately 2,200 within ten years. EDDYSTONE REHABILITATION PROCEEDS After 26 years of reliable service , Eddystone Generating Station's Unit o. 1 received a new lease on life in 1986. Major equipment replacements were undertaken as part of a rehabilitation program designed to a llow the Compa n y to extend the lif e of Unit No. 1 into the 21st century. Similar work had already been completed on Unit No. 2. With completion of the rehabilitation , these low-cost , coa l-fir ed unit s remain available for base-load capacity.

TRAINING EXPANDED Durin g 1 986 , a ll the C omp a n y's nucl ea r o p e rati o n a nd maint e n a n ce trainin g prog ra m s rec e i v ed ac cr e dit a ti o n from th e Na ti o nal Acad e m y for N ucl ea r Tr a ining o f th e In s titute o f N ucl e ar P owe r O p e r a ti o n s. Ex c e ll e n ce in nucl ea r tr a inin g is a k ey e l e m e nt in ac hi ev ing th e hi g h es t s t a nd a rds o f o p era tin g nucl ea r pl a nt safe ty a nd r e li a bilit y. Th e Co mpan y's P eac h B o tt o m Ato mi c P owe r S tati on b e c a me a n ea rl y branch o f th e A cad e my w h e n th e s t a ti o n's fir s t fiv e tr a in i ng pr o gr a m s r ece i ve d a c c r e dit a tion in 1 9 85. Lim e r ic k Ge n e r a ting S tati on p e r so nn e l wo rk e d in co njun c ti o n w ith P eac h B o tt om p erso nn e l to d eve l o p five a dditi o n a l tra inin g programs a t P eac h B o tt o m a nd t e n progr a ms a t Lim e ri ck , w hich r es u lte d in Lim e rick's e ntr y int o th e A c a d e m y. With th e accr e ditati o n of a ll tw e nt y tr a inin g pr og r a m s , th e Co m pa n y b e c a me o ne o f t h e fir s t multipl e-s it e utiliti es to a tt ai n full m e mb e r s t a tu s in th e Aca d e m y. R ecog n iz in g th e n ee d fo r a l a r ger t rai nin g faci lit y fo r M aint e n a n ce Di v i s i on p e r s onnel , th e Co mp a n y h as co n ve rt ed i ts r e tir ed B a rb a d oes Ge n e r a ting S tati on n e ar N orri s to w n to th e B a rbad oes Maint e n a nc e Trainin g Ce nt e r. B y puttin g th e n ew tr a i nin g ce nt e r into o p era ti o n in 1 986 , th e Co mp a n y m ove d closer t o i ts goa l of h av in g 775 tra in ed m a int e n a n ce c r af t s m en b y 1 990. N ucl ear p owe r pl a nt m a int e n a nc e proj ects a l so ha ve b ee n in c orp o rat e d in the B a rb a d oes training. S uch projects a llow tr a in ees to wo rk in a s imul a t e d radi a ti o n a r ea. P E's M a int e n a n ce Di v i s i o n craf t progra m s we r e r ev i ewe d ex t e n s i ve l y by t h e In s t i tut e of ucl ear P owe r O p era ti o ns a nd g i ve n fo rm a l acc r e ditati o n. PJM INTERCONNEC TI O N CUTS C OSTS In 1 986 , P E c u stome r s saved 530 m i lli o n in e n e r gy costs , thanks to the P e nn sy l va ni a-New J ersey-Mar y land (PJ M) I nterco n nect i on. Whi l e l ess than in pr ev i o u s yea r s (d u e to l ower oil p ri ces a nd m u ch l ower p ur chases as th e res ult of t he o p e r a ti on of Limerick U nit No. 1), the a n n u a l savings r e m a in e d s u bs t a nti a l. T h e PJ M Int ercon n ection , the wor ld's fi r st i nt egrated power pool , was created i n 1 927 con n ecting three ut ili ties , i ncluding PE. The present PJM s tm c tur e was established in 1965 as a j o int en t erpr i se of 11 iow n e d utiliti es , w h ic h forma ll y ag r eed to o p e r a t e as a s in g l e sys t em to ac h ieve the s i g nifi ca nt b e n efits to be rea li zed th ro u gh p rovi d i n g r e li able service at the l owes t poss i b l e cost. U sing the l a t es t co m p u te r tec h no l ogy , a staff of P E em pl oyees opera t es t h e contro l ce nt e r in Va ll ey Forge , Pe n nsy l va ni a , A n ine-week splic i ng school training program te ac h es employees the proper lead splicing techniques for underground urban electrical lines.

training Leroy Leighty, Transmission and Distribution, pours molten solder lead to join sleeve to lead jacket cable while instructor Bruce W Bortz looks on. P fl fire training s ch o ol in West C o n shohocken has rec e ive d community-wide re c ognition for its safe fire fighti ng i n st r uction, particularly for fires involving electricity and gas, and has helped numerous fire companies with thei r training.

Commitment to Public Communication PE will be open and forthright in our communication with our customers, shareholders, employees and all others involved with our business.

We will seek and respectfully consider const ructi ve public input concerning our steuxirdship in constructing and operating the facilities necessary to providing safe, reliable and economical utility service. constantly monitoring PJM and surrounding systems and dispatching power generation and transmission.

Costs are reduced by sharing reserves and coordinating maintenance. Energy needed to serve the joint system load is produced b y combining the most economical sources available from any of the interconnected utilities. GAS RATES REDUCED During 1986 , the Company reduced gas rates by S46.6 million for 318 , 000 gas customers in Bucks, Chester , Delaware and Montgomery Counties. For a residential gas home heating customer , this reduction caused a 7.7% decrease in a typical annual bill , from S912 to S842. This decrease was primarily due to the Company's ability to make prudent purchases of gas from producers and pipeline suppliers The Limerick Information Center hoses many visitors.

This opcics display panel wich accompanying soundtrack explains che basics of boiling wacer reaccor operations co cwo Reading School District teachers , Nancee Ryan and Michael Herzfeld. The production of che corporate annual report is one of che many major communications efforts. Designer George Coan (right), assisted by James H. Miller (left}, Financial Division, reviews photographs. under more favorable market conditions and reductions in pipeline supp liers' rates in 1986. COST REDUCTION MEASURES REVIEWED The Company always has sought to control costs whi l e continuing to provide reliable , quality service to customers.

During the year, a review was made of major cost reduction actions PE initiated between 1980 and 1 986. This review indicates that the Company saved customers S 1. 2 billion during this period. Actions taken should result in continuing ann u a l savings of approximately S 1 93 million. Over the 1980-1986 period , related savings in the Company's electric , gas and steam businesses amounted to approximately

$778 million or 65% of the total SI.2 billion Electrical safety is emphasized in the " Redd y and E ddy Show ," which travels to area elementar y s c hools. Edward L. Dick demonstrates electrical pr in ciples to student Da vid}. Gea a s Robert Brown, the voice and animator of Reddy Kilowatt, observes.

sav ing s. T h e larg est it em in this category was 8602 million save d as a result of two-party , e l ect ric e ner gy purch ase ag re e m e nts b etwee n PE and com p a ni es to the wes t with l ow-c ost , coa l-fir e d power. Inn ova ti ve m e th o d s of financing th e Co mp a n y's cap it a l proje cts , including Limerick Generating Station , ha ve achieved sav in gs a ppro ac hing Sl9 5 million. Various inno va tive productivity impro ve m e n ts and cost sav ing me as ur es account for th e r e maining 822 1 mill i on o f savings. T h e savings figures includ e ove r 82.2 mil l ion from e mplo yee suggestions th a t were s ubmitt e d through the Co mpany's Emp l oyee Sugges t ion Sys tem. RESEARCH AND TECHNOLOGY ADVANCED In 1986 , th e Electric P ower R esearc h In s titute (E PRI) awa rd e d a $IO million contract to P E to d eve lop an on-line diagnostic monitoring center for pow e r pl a nts. The program will in vo lve a pr e dictive maint e nance diagnostic center and a techn o logy transfer center for th e utilit y indu s tr y , both to b e loc ate d at Eddystone Station. Currently, plant maintenance is eit h er r eac ti ve (r e pairs a r.e made as parts fail) or planned (a pr escr ibed course of work i s followed whether or not repairs are immediately needed). Predictive maintenance will a ll ow plant operators to recognize potential problems and estima t e in advance when repairs wi ll be req uir ed. This sys t em wi ll e limin a te unn ecessary maintenance an d increase plant ava il ab ilit y by decreasing the number of r eac tive o r forced outages. I t also w ill p rov id e guidance to operators on s tr esses to plant components.

Durin g the past yea r , th e Co mp a n y demonstrated o nc e again that it i s at th e forefront of technological pro g r ess in the e l ect ri c industry.

For exam ple, o il-c oo l ed tran sfo rm ers a t Peach B o tt o m , which o rdin a ril y mu st b e d e-e n e rgized for cleaning, were cleaned with a robotic arm b e ing d eve l o ped a nd tested b y th e Co mpan y in conjunction with E PRI. When p e r fected , the robotic arm wi ll provide a me a n s to work safe ly o n e n e r gize d , high-vo ltage equipment.

SAFETY IMPROVEMENTS REALIZED Throughout 1986, the Company continued to reduce work-related accidents through an effective safety program. In the past 24 months , time accidents have been reduced by over 55%. This exceptional improvement has been realized because of a program of increased safety awareness , new and improved training programs, employee interest and management involvement at all levels. REACHING CUSTOMERS AND COMMUNITY MARKETING HELPS BOOST CUSTOMER BASE Marketing programs in 1986 focused on providing information to customers on the efficient use of energy. For example , working with the heat pump industry , a media program targeted residential customers for conversion to electric heat pumps from oil heat. Similar l y , conversion to efficiency gas heating was promoted to customers along existing gas mains. In all market segments , PE continues to aid consumers to make energy purchases that complement their lifestyles or satisfy their business needs. More than 16 , 000 new living units were connected in 1986. In the residential market , electric space heating was installed in 67% of these units , with efficient heat pumps accounting for 92% of these new units. Another 22% will utilize gas heat. As a result , 89% of new living units in the Company's service territory will be using PE's clean and efficient energy products.

MINORITY OPPORTUNITIES ENHANCED PE's Affirmative Action Program is designed to enhance the participation of minorities and women in areas inside and outside the Company. This program assists applicants , employees , customers and vendors. Numerous programs have been designed to help minorities and women become better qualified as applicants for employment. As a result , the Company's minority work force has grown from 4% in 1969 to nearly 15% presently.

P E also has created programs to help high school students improve their skills , so that they may be able to meet employment standards. One such program is PREP (Program Resulting in Employment Possibilities).

PE has either created programs or joined existing programs in order to increase the availability of minority and women engineering graduates.

These programs include PEEP (Pre-Engineering Exposure Program), PRIME (Philadelphia Regional Introduction of Minorities to Engineering) and the High School A series of radio and television messages addresses the topics of service reliability, electrical safety, home energy audits and customer assistance programs. James L. Everett, Chairman, responds to a question at a Philadelphia Securities Association Luncheon.

The Company communicates with many varied groups throughout the year as part of its Investor Relations Program.

Academies Program (Academy of Applied Electrical Science).

PE contin u es to expand its support of minority businesses in the Philadelphia region through its materials and services procurement activities.

The Minority Business Development Program has been recognized and is enthusiastically supported by PE and the whole local business community.

Contracts awarded to minority businesses have increased tenfold si nc e the present program was formally adopted in late 1982. PE CARES BENEFITS MANY During 1986 , the PE Cares program again served many area residents.

PE Cares was established by Philadelphia Electric Company in 1981 as part of the Company's efforts to renew and strengthen its strong tradition of service to the people of the Delaware Valley. It was designed as a personalized program to assist that segment of the customer population which , because of age or infirmity , may have difficulty coping with the comp l exities of today's world. To date, more than 26 , 000 customers have been helped by PE Cares. This enth u siastic response has convinced PE to continue this effort. Among the many services provided to the PE Cares members are help in establis hing special payment arrangements , including the change of due dates to coincide with r ece ipt of Social john H. Austin, Jr., President , also serves as a community volunteer.

He is President of the United Way of Southeastern Penns ylvania. Commitment to Good Citizenship PE will be a responsible corporate citize n by contributing to the common good both in our service area and in the nation. Earl K. Parker (l eft) and H. B. Winitsky (right), both of Purchasing Department , accept the "Most Visible In-House Program" award from the Minority Input Committee of the New Penn-Del Regional Minority Purchasing Council.

Security or retirement checks and budget billing. The PE Cares r epresentatives also can arrange for third-party notification of all matters pertaining to a customer's account , provide programs concerning safet y and conservation and help direct the PE Ca r es participants to governmental and private assistance programs , as appropriate.

AUTOMATED PROGRAMS IMPROVE SERVICE The Company continued to improve its C u stomer Communication System in 1986. An important component of tills overall system is the Trouble Management System , which sets priorities for scheduled work e l ectronically and allows the status of each job to be automatically updated daily. During a s t orm, this system helps to assign the correct work force and eq uipm ent so that service can be restored as quickly an d efficient l y as possible.

This results in shorter interruptions for cus tom ers and ena bl es P E to maintain its high standard of service reliability. In 1986 , Amanda L. Coleman, Public A ff air s , serves on numerous community and civic commiccees , including the new Penns ylva nia Convention Center Authorit y. She is pictured next to a model of the planned center. the Compan y achieved a nearly perfect record of reliable service wi th a service availability index of 99. 989%. Another part of the Customer Communication System is the Field Order Dispatch Sys t em wh ich allows gas service calls to be electronically transmitted from the ca ll-taking areas to the dispatch office. This greatl y enhances safety , since it ass ur es prompt handling of gas eme r gencies. Finally , the third C u stomer Commun i cation System component , th e Service Applications Management System , permits efficient tracking of new construction so that electric and gas service and installation of meters may be provided efficient ly a nd promptl y. These mod e rn systems give the Company th e means to offer customers eve n better , more reliable service th a n in the p ast. With these sys tem s , e mpl oyees can utili ze more efficient work m et hods a nd cut consuming paper work.

Management's Discussion and Analysis of Financial Condition and Results of Operations General Total revenue increased in 1986 over 1985 as a result of electric rate increases and higher electric sales. See "Electric Operating Revenue" below. Operation and maintenance expenses decreased in 1986 compared with 1985 as a result of lower fuel expense. The lower fuel expense was primarily due to the excellent performance of the Company's nuclear units. In accordance with the Declaratory Order issued by th,e Pennsylvania Public Utility Commission (PUC) on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and income taxes associated with Limerick Unit No. 1 and 50% of common plant from February 1, 1986, the date of commercial operation, untilJune 27, 1986, the date the plant was included in rates. The combination of this Declaratory Order and theJune 27, 1986 rate order, which permits continued accrual of an amount equivalent to Allowance for Funds Used During Construction (AFUDC) on the remaining 50% of common plant, contributed approximately

$221 million to 1986 common stock earnings.

OnJune 27, 1986, the PUC modified the Company's Energy Cost Rate (ECR) so that only 80% of the difference between actual electric energy costs and the amount billed to the customers is subject to fact reconciliation for over/under collections.

On October 1, 1986, gas rates were reduced by approximately

$47 million. This change was due primarily to lower fuel costs. Periodic rate relief may be required in the future to offset increases in operating costs or carrying charges in order to prevent any adverse effects on future net income, earnings per average common share and the Company's ability to raise funds. The Tax Reform Act of 1986 (Act) introduces substantial changes to the corporate tax structure beginningJanuary 1, 1987. The rules under which corporations compute their taxable income have been significantly changed. Some of the changes affecting the Company are changes in the corporate tax rate, depreciation rates and repeal of the investment tax credit (ITC). The Company is currently in the process of reviewing the specific impacts of this Act on its future tax liabilities, liquidity and financing plans. In the long run, the Act may increase the Company's cost of doing business.

ITC and deferred income taxes have provided significant sources of capital. Although the Company will be entitled to certain ITCs after January 1, 1987 because of carryovers from prior years and portions of its construction program qualifying under transition rules, the benefits of that ITC will be reduced. Repeal of ITC (other than prior year carryovers and qualified transition.

property) and reductions in deferred income taxes resulting from reduced corporate tax rates will increase the Company's external financing requirements.

Although the corporate income tax rates are reduced, these reductions are offset by the repeal of the ITC, imposition of the Alternative Minimum Tax and other changes which will increase the Company's cash tax payments.

In December 1985, the Financial Accounting Standards Board issued Statement No. 87, Employer's Accounting For Pensions.

This statement becomes *effective in 1987. Statement No. 87 prescribes a method for determining periodic pension cost which differs significantly from the method utilized by the Company in 1986 and prior years. Historically the Company has used the same method for determining periodic pension cost as used for funding the pension plan. Beginning in 1987, the method prescribed by Statement No. 87 for measuring periodic pension cost will differ from the method utilized for funding purposes.

Accordingly, in 1987 and subsequent years, contributions to the pension plan might differ from periodic pension cost recorded in the financial statements.

The Company has determined that pension cost for 1987, determined in accordance with Statement No. 87, will be approximately

$10 million less than 1986 pension cost. In December 1986, the Financial Accounting Standards Board issued Statement No. 90, Regulated Enterprises

-Accounting/or Abandonments and Disallowances of Plant Costs. The Company is required to adopt this statement by 1988. One of the provisions of Statement No. 90 requires the Company to recognize as a loss regulatory disallowances related to plant investment.

Previously such amounts were included in the costs of the. plant and depreciated over the plant's life. This Statement may require the Company to record a loss equal to the $368.9 million of Limerick Unit No. 1 cost excluded from rate base by the PUC in its order of June 27, 1986. The Company may apply the provisions of this Statement cumulatively in the year of adoption or it may retroactively restate previously issued financial statements.

It should be noted that the Company has filed a petition for review of the PU C's June 27, 1986 order with the Commonwealth Court of Pennsylvania concerning the PUC's Limerick rate base disallowance.

Although Statement No. 90 would have significantly affected 1986 results of operations if applied in 1986 (see Note 2 to the Consolidated Financial Statements), the Company believes that, should its aforementioned petition for review be denied, adoption of Statement No. 90 will not significantly affect the Company's future financing plans or its ability to pay dividends.

Electric Operating Revenue Increased electric revenue in 1986over1985 is attributable to higher base rates and increased sales. Kilowatthour sales of electricity to retail customers increased 3 percent in 1986over1985.

The increases of electric revenue in 1985 and 1984 over the previous corresponding periods are primarily attributable to higher base rates. Electric Revenue Millions of Dollars Increase/ (Decrease)

'86vs. '85 '85 vs. '84 '84vs. '83 Rate Increases s 185.0 s 141.4 s 140.0 Fuel Related Revenue (39.4) (2.8) 104.0 Sales and Other 37.6 (58.1) 83.8 Total s 183.2 s 80.5 S327.8 Gas Operating Revenue Lower gas revenue in 1986 compared with 1985 is attributable to decreases in large commercial and industrial sales, gas transported for others and lower related revenue resulting from reductions in the price of gas purchased from suppliers.

Gas revenue decreased in 1985 compared with 1984 due to a decrease in sales and lower fuel-related revenue resulting from reductions in the price of gas purchased from suppliers.

Gas revenue increased in 1984over1983 due to higher rates and increased sales. Fuel and Energy Interchange Expense For accounting purposes, fuel and energy interchange costs are deferred until billed as fuel adjustment revenue. See "General" above, regarding after-the-fact reconciliation for over/under collection.

In 1986, gross fuel and energy interchange costs were $281 million lower than in 1985 due primarily to the excellent performance of the Company's nuclear units. Fuel and energy interchange costs deferred in previous years and charged to expense in 1986 amounted to $189 million. In 1985, gross fuel and energy interchange costs were $212 million lower than in 1984 due primarily to the excellent performance of the Salem Nuclear Station. Fuel and energy interchange costs deferred in previous years and charged to expense in 1985 amounted to $135 million, resulting in net fuel and energy interchange expense remaining essentially the same in 1985 as in 1984. In 1984, gross fuel and energy interchange costs were essentially the same as in 1983; however, electric fuel costs deferred were lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense compared with 1983. Other Operating and Maintenance Expenses 1986 non-fuel operating and maintenance expenses increased over 1985 primarily as a result of the commercial operation of Limerick Unit No. 1. Other operating and maintenance expenses increased in 1985 and 1984 over the previous corresponding periods due to inflation, growth in utility plant and increased costs associated with the Company's nuclear generating units and with operating the new flue gas scrubbing systems at the Company's two wholly owned, coal-burning stations.

Depreciation Increases in depreciation in each of the last three years reflect additions to plant in service. The 1986 increase in depreciation over 1985 is primarily attributable to Limerick Unit No. 1 being placed in service. Income Taxes Income taxes charged to operations increased in 1986 over 1985 as a result of higher operating income.

_ ------------

tax credits, net, included in other income decreased as a result of lower allowance for borrowed funds used during construction.

Income taxes charged to operations decreased in 1985 compared with 1984 as a result of lower operating income and increased in 1984 compared with 1983 as a result of higher operating income. Income tax credits, net, included in other income, increased in 1985 and 1984 over the previous corresponding periods as a result of higher allowance for borrowed funds used during construction.

Other Taxes Other taxes decreased slightly in 1986 versus 1985 due to lower capital stock and realty taxes. In 1985 and 1984 other taxes increased due to higher capital stock and realty taxes, and higher realty and gross receipts taxes, respectively.

Allowance for Funds Used During Construction The decrease in AFUDC in 1986 compared with 1985 is a result of the commercial operation of Limerick Unit No. 1. The increases inAFUDC in 1985and1984 resulted from increases in construction work in progress.

Interest Charges Interest charges on debt increased in each of the last three years due to additional debt outstanding.

The ratio of earnings to mortgage interest, which is one measure of the Company's ability to issue additional mortgage bonds, was 2.82 times, 1.98 times and 2.55 times, at year end, for 1986, 1985 and 1984 respectively.

Capital Expenditures and Changes in Financial Position The Company is carrying on a construction program which is estimated to require expenditures of approximately

$1.2 billion in 1987 and $3.3 billion from 1988 to 1990. A majority of these expenditures relate to the construction of the Company's second 1055-mW nuclear generating unit at Limerick.

Successful completion of this program is dependent on the Company's ability to obtain external financing, primarily through debt arrangements and sales of equity securities which are subject to market conditions and to meeting certain earnings tests. The program also is subject to the licensing requirements of the Nuclear Regulatory Commission, to other regulatory approvals in connection with the planned supplemental cooling water system for Limerick, to financing approvals by the PUC and to changes due to litigation.

Interim financing of the construction program is provided by commercial paper borrowing and short-and intermediate-term bank loans, which also are dependent on the Company's financial position.

_

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income Operating Revenues Electric Gas Total Operating Revenues Operating Expenses Fuel and Energy Interchange Other Operating Expenses Maintenance Depreciation Income Taxes Other Taxes Total Operating Expenses Operating Income Other Income and Deductions Allowance for Other Funds Used During Construction Limerick Carrying Charges Income Tax Credits, Net Other, Net Total Other Income and Deductions Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Allowance for Borrowed Funds Used During Construction Net Interest Charges Income from Continuing Operations Income from Discontinued Steam Operations Estimated Loss on Disposal of Discontinued Steam Operations Net Income Preferred Stock Dividends Earnings Applicable to Common Stock Average Shares of Common Stock Outstanding (Thousands)

Income from Continuing Operations Per Average Common Share (Dollars)

Earnings Per Average Common Share (Dollars)

Dividends Per Common Share (Dollars)

• Reclassified for comparative purposes.

See notes to financial statements.

For the Year Ended December 31 1986 19ss* 19s4* (Thousands of Dollars) $2,699,365

$2,516,191

$2,435,731 391,504 428,984 462,966 3,090,869 2,945,175 2,898,697 889,277 1,097,731 1,069,849 618,257 548,609 510,726 274,200 262,419 242,675 222,568 183,049 176,433 288,930 199,900 242,854 232,627 240,962 206,339 2,525,859 2,532,670 2,448,876 565,010 412,505 449,821 76,821 176,310 134,485 188,679 102,462 133,415 116,423 2,462 (3,464) 239 370,424 306,261 251,147 935,434 718,766 700,968 <2> 458,885 435,373 402,475 12,512 17,721 30,912 (101,617)

(257,181)

(220,370) 369,780 195,913 213,017 565,654 522,853 487,951 1,916 2,448 4,438 (1,250) 566,320 525,301 492,389 90,961 90,577 82,682 $ 475,359 $ 434,724 $ 409,707 183,141 169,784 151,804 $2.59 $2.55 $2.67 $2.60 $2.56 $2.70 $2.20 $2.20 $2.20 0 Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS Utility Plant, at original cost Electric Gas Steam Common, used in all services Less: Accumulated Depreciation Net Utility Plant in Service Construction Work in Progress Leased Property, net Net Utility Plant Current Assets Cash and Temporary Cash Investments Accounts Receivable Customers Other Inventories, at average cost Fossil Fuel Materials and Supplies Deferred Income Taxes -Energy Costs Compensated Absences Other Total Current Assets Deferred Debits and Other Assets Unrecovered Revenue Deferred Limerick Costs and Carrying Charges Investments Loss on Reacquired Debt Other Total Deferred Debits and Other Assets Total 'Reclassified for comparative purposes.

See notes to financial statements.

December 31 1986 1985. (Thousands of Dollars) $ 8,875,150

$ 4,982,099 506,021 474,599 54,176 54,138 128,733 132,323 9,564,080 5,643,159 2,014,710 1,824,420 7,549,370 3,818,739 1,652,615 4,929,093 281,346 338,141 9,483,331 9,085,973 90,716 188, 785 345,432 348,233 30,174 22,687 54,517 63,594 75,219 60,152 44,842 (51,814) 50,800 46,370 27,681 25,402 719,381 703,409 112,472 195,617 89,702 87,670 76,783 48,589 70,734 86,204 545,308 222,463 $10,748,020

$10,0ll,845 CAPITALIZATION AND LIABILITIFS Capitalli:ation Common Shareholders' Equity Common Stock Other Paid-In Capital Retained Earnings Preferred Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt Total Capitalli:ation Current Liabilities Notes Payable, Bank Long-Term Debt Due Within One Year Capital Lease Obligations Due Within One Year Accounts Payable Taxes Accrued Deferred Energy Costs Interest Accrued Dividends Payable Compensated Absences Other Total Current Liabilities Deferred Credits and Other Liabilities Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tax Credits Other Total Deferred Credits and Other Liabilities Total $ December 31 1986 1985' (Thousands of Dollars) 2,832,967 7,787 653,127 3,493,881 572,472 374,956 4,286,792 8,728,101 108,570 69,379 182,498 86,187 88,215 90,701 39,607 50,800 29,153 745,110 211,966 694,990 320,107 47,746 1,274,809

$ 2,601,989 7,331 583,728 3,193,048 572,472 318,309 4,309,131 8,392,960 1,000 80,800 76,326 144,407 58,509 (101,655) 93,008 40,698 46,370 25,583 465,046 261,815 502,621 302,409 86,994 1,153,839

$10,748,020

$10,011,845

<8>

Philadelphia Electric Company and Subsidiary Companies ConsoUdated Statements of Changes In Cash Flows For the Years Ended December 31 1986 1985 1984 (Thousands of Dollars) Cash Flow From Operations Income from Continuing Operations $565,654 $522,853

$487,951 Non-Cash Items Included in Income Depreciation and Amortization 285,204 183,049 176,433 Nuclear Fuel Disposal Costs 5,601 13,201 Deferred Income Taxes 133,419 66,553 78,550 Investment Tax Credits, Net 29,041 3,582 49,941 Allowance for Other Funds Used During Construction (76,821) (176,310) (134,485)

Increase In Deferred Limerick Costs and Carrying Charges (179,592)

Increase in Unrecovered Revenue (112,472)

Amortization of Leased Property 65,600 60,900 39,100 Limerick Precommercial Fuel Cost 16,448 45,301 Change In: Deferred Energy Costs 189,870 128,240 (80,649) Other Current Assets and Liabilities 39,869 45,395 (41,043) Other Deferred Debits and Credits (17,707) 6,948 (16,112) Net Cash Flow From Continuing Operations 938,513 892,112 572,887 Net Cash Flow From Discontinued Operations 3,468 4,105 3,992 Net Cash Flow From Operations 941,981 896,217 576,879 Cash Flow From Financing Issuance of Common Stock 230,978 241,041 250,445 Issuance of Preferred Stock 75,000 100,000 <8> Retirement of Preferred Stock Including Change in Other Paid-in Capital (17,897) (7,322) (7,757) Dividends on Preferred and Common Stock (494,916)

(464,003)

(418,098)

Change in Dividends Payable (1,091) (3,098) 16,585 Expenses of Issuing Preferred and Common Stock (2,005) (870) (3,955) Issuance of Long-Term Debt, Including Capital Lease Obligations 869,471 732,364 317,337 Capital Lease Obligations (48,471) (46,364) (58,637) Retirement of Long-Term Debt (260,829)

(274,391)

(12,183) Premium on Retirement of Long-Term Debt (28,930) (45,450) Net Borrowings Under Revolving Credit Agreements (550,000) 150,000 200,000 Change in Short-Term Debt (1,000) (259,000)

(7,500) Capital Lease Payments (65,600) (60,900) (39,100) Change in Escrow Funds 2,872 74,775 (80,125) Transfer from Investments 19,656 Payment of Other Obligations (37,719) (61,843) Net Cash Flow From Financing (330,137)

(25,061) 276,668 Cash Flow From Investing Increase in Utility Plant, Including Leased Property (771,998)

(829,814)

(1,084,414)

Leased Property 48,471 46,364 58,637 Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Cost of Property Retired and Cost of Removal (86,332) (86,866) (44,014) Transfer (to)/from Deferred Debits 25,157 (11,923) Sale of Magnesium Oxide Facilities 55,92.8 Increase (Decrease) in Other Investments (2,032) (6,799) (1,082) Net Cash Flow From Investing (709,913)

(712,728)

(880,460)

Net Change in Cash Flow $(98,069)

$158,428 $(26,913)

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes in Common Stockholders' Equity and Preferred Stock Other Common Stock Paid-In Retained Preferred Stock Shares Amount Capital Earnings Shares Amount (All amounts in thousands)

Balance,Januaryl, 1984 142,811 $2,110,503

$5,856 $452,964 8,073 $807,335 Net Income 492,389 Cash Dividends Declared Preferred Stock (at specified annual rates) (83,820) Common Stock ($2.20 per share) (334,278)

Expenses of Capital Stock Issues (3,955) Issuance of Stock " ; Public Sales 11,613 144,548 1,000 100,000 Employee Stock Ownership Plans 914 10,563 Dividend Reinvestment and Stock Purchase Plan 6,965 95,334 Redemptions 871 (86) (8,628) Balance, December 31, 1984 162,303 2,360,948 6,727 523,300 8,987 898,707 Net Income 525,301 Cash Dividends Declared Preferred Stock (at specified annual rates) (90,524) Common Stock ($2.20 per share) (373,479)

Expenses of Capital Stock Issues (870) Issuance of Stock Public Sales 7,387 115,008 Employee Stock Ownership Plans 873 15,294 0 Dividend Reinvestment and Stock Purchase Plan 7,117 110,739 Redemptions 604 (79) (7,926) Balance, December 31, 1985 177,680 2,601,989 7,331 583,728 8,908 890,781 Net Income 566,320 Cash Dividends Declared Preferred Stock (at specified annual rates) (91,393) Common Stock ($2.20 per share) (403,523)

Expenses of Capital Stock Issues (2,005) Issuance of Stock Public Sales 6,000 117,216 750 75,000 Employee Stock Ownership Plans 625 13,215 Dividend Reinvestment and Stock Purchase Plan 4,774 100,547 Redemptions 456 (184) (18,353) Balance, December 31, 1986 189,079 $2,832,967

$7,787 $653,127 9,474 $947,428 See notes to financial statements.

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. --

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

1. Significant Accounting Policies General All utility subsidiary companies of Philadelphia Electric Company are wholly owned and are included in the consolidated financial statements.

Nonutility subsidiaries are included in investments and accounted for on the equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC). Revenues Revenues are generally recorded in the accounts upon billing to the customer.

Rate increases are billed from dates authorized or permitted to become effective by the regulatory authorities.

Pursuant to a rate phase-in plan approved by the PUC in its electric rate order of]une 27, 1986, the Company is recording revenue equal to the full amount of the rate increase approved, based on kilowatthours billed to customers.

Amounts included in revenue which will not be billed to customers within one year are classified as Unrecovered Revenue in the accompanying balance sheet (see Note 2). Fuel Adjustment Clauses Each of the Company's classes of service is subject to fuel adjustment clauses designed to recover or refund the differences between actual costs of fuel, energy interchange, purchased power, and gas, and the amounts of such costs included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Generally such rates are adjusted annually.

In its June 27, 1986 electric rate order, the PUC modified the electric energy clause to allow the recovery of only 80% of the difference between actual energy costs and the amounts billed to customers.

If the Company recovers more than actual energy costs, 80% of the excess is refundable to customers (see Note 2). Nuclear Fuel Nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is burned. Depreciation For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method and, for tax purposes, generally, over shortedives on accelerated-methodS:

Tlie estimatecf decommissioning costs of operating nuclear generating plants, totaling approximately

$287,801,000 as of December 31, 1986, are being charged to operations as permitted for rate-making purposes.

The amounts charged are deposited in an escrow account and invested for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable through adjustments of rates charged to its customers.

Annual depreciation provisions, expressed as a percent of average depreciable utility plant in service, were approximately 2.95% in 1986, 3.35% in 1985 and 3.29% in 1984. Income Taxes Deferred income taxes are provided for differences between book and taxable income to the extent permitted for rate-making purposes.

Investment tax credits, other than credits resulting from contributions to employee stock ownership plans, which do not affect income, are deferred and amortized to income over the estimated useful life of the related utility plant. Allowance for Funds Used During Construction (AFUDC) AFUDC is a non-cash item which is defined in the Uniform Systems of Accounts as "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used!' AFUDC is recorded as a charge to Construction Work In Progress, and the equivalent credits are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income" for the remainder as the allowance for other funds. The rate used for capitalizing AFUDC, which averaged 9.55% in 1986, 9.50% in 1985, and 9.40% in 1984, is computed under a method prescribed by the regulatory authorities.

The rate is a "net after-tax rate" and the current income tax reductions applicable to the interest charges capitalized are recorded in "Other Income:' AFUDC is not included in taxable income and the depreciation of capitalized AFUDC is not tax deductible.

Limerick Carrying Charges Under the Uniform System of Accounts prescribed by the FERC, accrual of AFUDC ceases at the time utility plant under construction is placed in service and 100% of common plant of a two-unit plant is deemed to be in service with the first unit. However, the PUC permits only 50% of the common plant to be included in rate base when the first unit is placed in service. Because of the difficulty in synchronizing the recovery of Limerick Unit No. 1 's cost through rates with its commencement of commercial operations, the PUC allowed the Company to record a carrying charge equivalent to AFUDC on the unit and common plant until they were included in rate base on June 27, 1986. In addition the PUC is permitting the Company to record a similar carrying charge on the 50% of common plant which was deemed to be associated with Unit No. 2 and was not included in rate base-un<iffiliCJune27, 1986 electric rate order. Such carrying charges are recorded as a charge to Deferred Debits and as a credit to Other Income.

Gas Exploration and Development Joint Ventures The Company has invested in several joint ventures for exploring and drilling for natural gas. Costs are capitalized under the full cost method and charged to operations commensurate with production.

Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are deferred and amortized to interest expense over the period permitted for rate-making purposes.

2. Limerick Generating Station General The Company's Limerick Unit No. 1 commenced commercial operation on February 1, 1986. Construction of the second of the two nuclear units at Limerick resumed in February 1986, following a suspension of approximately 2 years. Unit No. 2 is scheduled to be completed in late 1990. At December 31, 1986, Unit No. 2 was approximately 49 percent complete based on estimated man-hours needed to complete the Unit. As of December 31, 1986, the Company had invested approximately Sl.9 billion in Unit No. 2, including 50% of common plant. Limerick Unit No. 1 Rate Proceedings On September 27, 1985, the Company filed with the PUC for a phased-in electric rate increase designed to yield $671 million annually, net of fuel savings, to recover the costs associated with Limerick Unit No. 1 and 100% of common plant. By order entered June 27, 19,86, the PUC approved an increase of approximately

$ 3 51 million annually, net of fuel savings. The PUC authorized a rate of return on common equity of 14.75%. The increase is being phased-in over three years in equal steps, followed by a three-year recovery period, without interest, of amounts recoverable under the phase-in plan. In accordance with its prior practice, the PUC excluded 50% of common plant from rate base at this time, but permitted continued accrual of an amount equivalent to AFUDC on the excluded 50%. Accordingly, the Company is accruing a carrying charge equivalent to AFUDC on this investment.

The increase also reflects an exclusion from the Company's rate base of $368.9 million due to alleged imprudent construction delays in 1976 and 1978. As indicated below the Company has appealed this exclusion.

The PUC rejected allegations by various parties that Limerick Unit No. 1 represents excess capacity.

For a description of the effects of the June 27, 1986 electric rate order on the Company's accounting policies, see Note l. In accordance with the Declaratory Order issued by the PUC on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and associated income tax effects of Limerick Unit No. 1 and 50% of common plant from February 1, 1986, the date of commercial operation, until the plant was included in rates onJune 27, 1986. The recovery of these costs will be addressed by the PUC in a subsequent electric rate case. Of the $195.6 million of Deferred Limerick Costs and Carrying Charges, the Company had deferred a total of $155.2 million associated with the Declaratory Order. Prospective Accounting Change In December 1986, the Financial Accounting Standards Board issued its Statement No. 90, Regulated Enterprises

-Accounting for Abandonments and Disallowances of Plant Costs, which requires any disallowed costs of recently completed plants to be recognized as a loss. The Company is required to adopt this Statement by 1988. The provisions of the Statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements.

If the Company chooses to apply the provisions of Statement No. 90 by retroactive restatement in the year of adoption and the PUC's disallowance of $368.9 million of Limerick Unit No. 1 costs from rate base is not reversed, $368.9 million would be written off as of 1986. This write-off would reduce 1986 income from continuing operations and net income, as reported, by $249 million and the related per share amounts by $1.36. At December 31, 1986, net utility plant in service, deferred income taxes and retained earnings would be reduced by $364.2 million, $115.2 million and $249.0 million, respectively.

After giving effect to the write-off, 1986 proforma results of operations and related per share amounts would be as follows: Proforma As Reported Assuming Retroactive Restatement (Millions of Dollars, Except Per Share Amounts) Income from Continuing Operations . . . S565.7 Net Income . . . . . . . . . . . . . . .

S566.3 Per Share Amounts: Income from Continuing Operations

............. . Net Income .............. . S2.59 $2.60 Limerick Unit No. 2 Cost Cap S316.7 S317.3 $1.23 $1.24 On December 23, 1985, following a PUC investigation, the Company filed its response with the PUC accepting the conditions of the cost containment and operating incentive plans set forth in the PU C's December 5, 198 5 order, which concluded that the Company,could complete the construction of Limerick Unit No. 2 conditioned upon the acceptance by the Company of such cost containment and operating incentive plans, including a maximum net rate base allowance for Unit No. 2 (exclusive of common plant) of a prudent investment of $ 3 .197 billion. This order has been appealed by various parties. Under Statement No. 90 described above, if the Company estimates the total cost to complete Unit No. 2, includingAFUDC, would exceed the $3.197 billion cap, an immediate charge to expense would be recognized for the excess. The Company estimates the cost of Limerick Unit No. 2 will not exceed the $3.197 billion cap.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

-Continued Excess Capacity Standards On July 10, 1986, the Governor of Pennsylvania signed into law legislation amending numerous provisions of the Pennsylvania Public Utility Code. Among the provisions of the legislation which affect rate regulations, one provision imposes standards on the PUC in determining whether new generating capacity is excess capacity.

This provision requires a disallowance from rates of any portion of new capacity which is determined to be excess capacity.

The provisions relating to excess capacity are applicable to rate cases "pending before the On]une 27, 1986, the Office of Consumer Advocate (OCA) filed a Petition for Reconsideration which sought amendment of the PUC's order enteredJune 27, 1986 with respect to the finding that Limerick Unit No. 1 was not excess capacity.

Additional Petitions for Reconsideration on excess capacity and other issues were filed by certain other parties onJuly 1, 1986, July 7, 1986, July 11, 1986 and July 15, 1986. OnJuly 10, 1986 the OCA filed a Supplemental Petition for Reconsideration which alleged that the Limerick Unit No. 1 rate case was pending at the time the legislation was enacted and sought application of the excess capacity provisions of the legislation to the Limerick Unit No. 1 rate case. On July 16, 1986, a group of the Company's industrial customers filed a Supplemental Petition for Reconsideration joining the OCA's Supplemental Petition for Reconsideration.

By orders entered July 25, 1986, the <§> PUC denied all Petitions for Reconsideration and Supplemental Petitions for Reconsideration.

The PUC held that the legislation did not apply to the Limerick Unit No. 1 rate case. Furthermore, the PUC held that, even if the legislation did apply, Limerick Unit No. 1 did not constitute excess capacity under the standards imposed by the legislation.

On July 25, 1986, the OCAfiled a Petition for Review with the Commonwealth Court of Pennsylvania (Commonwealth Court) of the PUC'sJune 2 7, 1986 electric rate order on the issue of excess capacity and on a particular rate base issue regarding whether certain utility plant was used and useful. On July 28, 1986, PetitionsforReviewofthe PUC'sJune 27, 1986 electric rate order were filed with the Commonwealth

3. Sale of Steam Operations Court by the Company appealing the exclusion of $ 368. 9 million from rate base and by a group of the Company's commercial and small industrial customers on the issue of excess capacity and on various rate design and cost of service issues. Supplemental Cooling Water The unavailability of sufficient supplemental cooling water would limit or prohibit operation of Limerick Unit No. 1 and Unit No. 2 (when in operation) during certain months of the year. The Delaware River Basin Commission (DRBC) has approved various Company requests for modification of restrictions on the use of the Schuylkill River for Limerick cooling water (which restrictions create the need for supplemental cooling water for Limerick), a reallocation of cooling water to Limerick from other power plants on the Schuylkill River and the use of water from an upstream municipal reservoir.

The DRBC's approvals were effective through December 31, 1986, and the Company has filed similar requests with the DRBC for its 1987 supplemental cooling water needs. One component of the planned supplemental cooling water system for Limerick is the Point Pleasant Project. The Point Pleasant Project has been the subject of substantial opposition from various groups, including the majority of the Commissioners of Bucks County, and the NeshaminyWater Resources Authority (NWRA). Petitions for Allowance of Appeal were filed with the Supreme Court of Pennsylvania by the Commissioners of Bucks County, NWRA, and a taxpayer in Bucks County from the decision of the Commonwealth Court of Pennsylvania, affirming the decision of the Court of Common Pleas of Bucks County ordering the completion of the Point Pleasant Project. On May 8, 1986, the Supreme Court of Pennsylvania denied the Petition for Allowance of Appeal filed by NWRA. OnJune 23, 1986, the Supreme Court of Pennsylvania denied the remaining two Petitions for Allowance of Appeal. Construction of the Point Pleasant Project has not yet resumed. The Court has appointed a special master to oversee the implementation of the court order that the project be completed.

On June 30, 1986, the Company signed an agreement for the sale of its steam operations.

The sale was completed on January 30, 1987. The Company recorded an estimated loss on disposal of $1,250,000, which includes $1,000,000 in income tax expense associated with timing differences for which deferred taxes, in accordance with the rate-making treatment, had not been provided.

Operating results of the steam operations for 1986, 1985 and 1984 are reported separately as discontinued operations in the accompanying financial statements and are summarized below. Income from Discontinued Operations includes a $1.0 million loss for the period fromJuly 1, 1986 to December 31, 1986. Steam Revenues Operating Expenses, Excluding Depreciation and Taxes Depreciation Income and Other Taxes Income from Discontinued Operations 1986 1985 (Thousands of Dollars) $51,067 $68,529 (45,692) (61,680) (1,923) (1,916) (1,536) (2,485) $ 1,916 $ 2,448 1984 $82,320 (71,570) (1,893) (4,419) $ 4,438

4. Common Stock At December 31, 1986, and 1985, Common Stock without par value, consisted of 240,000,000 shares authorized and 189,078,606and177,679,977 shares, respectively, outstanding.

At December 31, 1986, there were 19,795,818 shares reserved for issuance under stock purchase plans. 5. Preferred Stock At December 31, 1986, and 1985, Preferred Stock, $100 par, cumulative, 10,000,000 shares authorized:

Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1986 1985 1986 1985 (Thousands of Dollars) Series (without mandatory redemption) 14.15%(c)

$114.15 2-1-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 113.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) 112.80 5-1-88 750,000 750,000 75,000 75,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 103.00 500,000 500,000 50,000 50,000 7.80% 103.00 750,000 750,000 75,000 75,000 7.75% 101.00 200,000 200,000 20,000 20,000 4.68% 104.00 150,000 150,000 15,000 15,000 4.4% 112.50 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 15,000 15,000 3.8% 106.00 300,000 300,000 30,000 30,000 5,724,720 5,724,720 572,472 572,472 Series (with mandatory redemption) (d) 17.125% $117.13 5-1-87 300,000 300,000 30,000 30,000 15.25% 110.00 5-1-90 450,000 500,000 45,000 50,000 14.625% (e) 5-1-90 500,000 500,000 50,000 50,000 10% 103.33 5-1-90 176,000 220,000 17,600 22,000 9.52% 103.00 375,360 393,690 37,536 39,369 9.50% 1986 Series 109.50 11-1-91 750,000 75,000 8. 75% 1978 Series 104.63 5-1-88 400,100 433,400 40,010 43,340 7.325% 103.51 510,000 540,000 51,000 54,000 7% 101.00 288,100 296,000 28,810 29,600 3,749,560 3,183,090 374,956 318,309 Total Preferred Stock 9,474,280 8,907,810

$947,428 $890,781 (a) Redeemable, at the option of the Company, at the evidenced by Depositary Receipts, each representing indicated dollar amounts per share, plus accrued 1/10 of a share of Preferred Stock. dividends. ( d) Sinking Fund requirements (par value) in the period (b) Prior to the date specified, none of the shares of each 1987-1991 are as follows: 1987-$14,766,000; series indicated may be redeemed through refunding at an 1988-$16,740,000; 1989-$17,530,000; interest cost or dividend rate which is less than the 1990-$27,530,000; 1991-$23,130,000.

dividend rate of such series. (e) Not redeemable prior to May 1, 1990. ( c) Ownership of these series of Preferred Stock is 0

<§> Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

-Continued

6. Long-Term Debt First and Refunding Mortgage Bonds (a) Series 4%% 4%% 3%%-14% 5%-14% 14% 14% Due 1986 1987 $ 1988 1989 1990 1991 At December 31 1986 1985 (Thousands of Dollars) $ 50,000 40,000 40,000 52,500 52,500 62,500 62,500 11,000 11,000 11,000 11,000 4Y2%-151;4%

1992-1996 748,633 650,725 1997-2001 530,939 535,184 8Y2%-12Y2%

2002-2006 500,000 500,000 6%-18%% 2007-2011 221,591 394,273 8"Vs%-18%

2012-2016 882,379 698,379 Total First and Refunding Mortgage Bonds 3,060,542 3,005,561 Notes Payable -Banks (b) 1987-1992 225,000 225,000 Notes Payable -Other 17% 1987 10,000 20,000 Revolving Credit and Term Loan Agreements (c) 550,000 Pollution Control Notes 5Y2%-13% 1997-2013 272,420 272,685 Debentures 4.85% 1986 20,800 Debentures 1990 50,000 50,000 Debentures 9.85%-14%%

1993-2011 787,000 250,000 Sinking Fund Debentures

-Philadelphia Electric Power Company, a Subsidiary Unamortized Debt Discount and Premium, Net Total Long-Term Debt Due Within One Year (d) Long-Term Debt included in Capitalization (e) (a) Utility plant is subject to the lien of the mortgage.

InJuly 1986,the Company called $46,904,000 princip<1.l amount ofl 7%% series due 2011 and in September 1986, called $48,869,000 principal amount of 18%% series due 2009. A portion of the proceeds from the Company's November 1986 sale of $150,000,000 principal amount of 101;4% series due 2016 and $100, 000, 000 principal amount of 8%% series due 1994 was used to repurchase

$76,909,000 principal amount of 15%% series due 2010. Premiums on the repurchases of $30,878,322 were charged to loss on reacquired debt. (b) At various interest rates. (c) At December 31, 1985, the Company had a $550 million revolving credit and term loan agreement with a group of banks which provided financing to complete 4Y2% 1995 14,580 15,325 (24,180) (19,440) 4,395,362 4,389,931 108,570 80,800 $4,286,792

$4,309,131 Limerick Unit No. 1. In 1986 the Company repaid the $550 million of borrowings, thereby terminating the agreement.

The Company also has a $400 million Revolving Credit and Term Loan Agreement with a group of banks which expires in 1987. There is an annual commitment fee of%% on the unused amount. There were no borrowings under this agreement during the year. (d) Long-term debt maturities in the period 1988-1991 are as follows: 1988-$91,689,000; 1989-$78,863,000; 1990-$77,850,000; and 1991-$77,850,000. ( e) The annualized interest on long-term debt at December 31, 1986, was $443.8 million of which $304.4 million was associated with mortgage bonds and $139.4 million was associated with other long-term debt.

7. Short-Term Debt Average Short-Term Borrowings Average Interest Rates, Computed on Daily Basis Maximum Short-Term Borrowings Outstanding 1986 1985 1984 (Thousands of Dollars) $ 233 9.51% $1,000 $127,392 $166,713 6.38% 9.88% $360,000 $302,500 Average Interest Rates on Short-Term Borrowings at December 31: Bank Loans Pollution Control Notes At December 31, 1986, the Company had no short-term debt outstanding under formal and informal lines of credit with banks aggregating approximately

$ 368 8. Jointly Owned Electric Utility Plant 9.50% 9.95% 6.44% million. The Company generally does not have formal compensating balance arrangements with these banks. The Company's ownership interests in jointly owned utility plant at December 31, 1986 were as follows: Peach Bottom Salem Operator Philadelphia Public Service Electric Electric and Company Gas Company Participating Interest 42.49% 42.59% Company's share of: Utility Plant $515,149 $914,589 Accumulated Depreciation 134,065 170,460 Construction Work In Progress 22,707 25,948 The Company's participating interests are financed with Company funds and, when placed in service, all 9. Income Taxes Included in Continuing Operations:

Federal Current Deferred Investment Tax Credits, Net State Current Deferred Included in Other Income and Deductions:

Federal State Total Investment tax credits (ITC) and income tax credits resulting from contributions to employee stock ownership plans reduced Federal income taxes currently payable by $43 million in 1986, $12 million in 1985 and $58 million in 1984. Under the Tax Reform Act of 1986, ITC has been repealed effective January 1, 1986 with the exception of transition property.

The Company believes that Limerick Unit No. 2 qualifies as transition property eligible for ITC.

• Production Plants Transmission Plant Merrill Creek Keystone Conemaugh Reservoir Pennsylvania Pennsylvania Jersey Central Various Electric Electric Power& Companies Company Company Light Company 20.99% 20.72% 44.24% 21%to43% (Thousands of Dollars) $67,028 $64,457 $68,456 24,824 25,205 15,985 2,004 6,008 $38,718 operations are accounted for as if such participating interests were wholly owned facilities.

1986 1985 1984 (Thousands of Dollars) $ 96,562 $105,165 $ 91,769 132,238 60,061 51,747 29,041 3,582 49,941 29,908 24,600 22,594 1,181 6,492 26,803 (83,631) (109,580)

(93,818) (18,831) (23,835) (22,605) $186,468 $ 66,485 $126,431 Approximately

$227 million of additional ITC generated from 1983 through 1986 has not been utilized due to limitations based on taxable income. These credits which expire between 1998 and 2001 maybe used to reduce Federal income taxes in future years; however, approximately

$219 million of these ITC carryovers may be reduced by l 7Yz% in 1987 and by an additional l 7Yz% in 1988 under the provisions of the Tax Reform Act of 1986. <§>

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

-Continued For a number of years the Company has used accelerated depreciation for income tax purposes and straight line depreciation for financial reporting purposes.

Deferred taxes were recorded only on those timing differences recognized for rate-making.

The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately

$730 million at December 31, 1986. Since the Company expects to charge customers for taxes when the timing differences reverse, the tax effect of such timing differences is not recorded currently.

Provisions for deferred income taxes on continuing operations consist of the tax effects of the following timing differences:

1986 1985 1984 (Thousands of Dollars) Depreciation arid Amortization

$127,278 $ 34,297 $ 33,814 Nuclear Waste Disposal Costs (5,932) (7,355)

Deferred Energy Costs (95,383) (65,393) 43,761 Precommercial Operation of Limerick Unit No. 1 10,210 97,867 Deferred Limerick Costs 11,004 Loss on Reacquired Debt 14,305 24,592 Unrecovered Revenue 55,040 Other 10,965 (18,878) 8,330 Total $133,419 $ 66,553 $ 78,550 The total income tax provisions on continuing operations differ from amounts computed by applying the Federal statutory tax rate to income and adjusted income before income taxes for the following reasons: Income From Continuing Operations

$565,654 $522,853 $487,951 Total Income Tax Provisions 186,468 66,485 126,431 Income Before Income Taxes 752,122 589,338 614,382 Deduct: Allowance for Funds Used During Construction (non-taxable) 178,438 433,491 354,855 Limerick Carrying Charges (non-taxable) 188,679 Adjusted Income Before Income Taxes $385,005 $155,847 $259,527 Income Taxes on Above at Federal Statutory Rate of 46% 177,102 71,689 119,382 Increase (Decrease) due to: Depreciation Timing Differences Not Normalized 19,230 7,062 6,975 State Income Taxes, Net of Federal Income Tax Benefits 6,620 3,919 14,467 Amortization of Investment Tax Credits (13,468) (8,250) (7,738) Other, Net (3,016) (7,935) (6,655) Total income tax provisions

$186,468 $ 66,485 $126,431 Provision for Income Taxes as a Percent of: Income Before Income Taxes 24.8% 11.3% 20.6% Adjusted Income Before Income Taxes 48.4% 42.7% 48.7%

10. Taxes, Other Than Income 1986 1985 1984 (Thousands of Dollars) Gross Receipts $132,468 $128,346 $122,881 Capital Stock 25,511 28,091 13,160 Realty 49,110 62,222 47,923 Other 25,538 22,303 22,375 Total $232,627 $240,962 $206,339

11. Investments At December 31 Gas Exploration and Development Joint Ventures Real Estate Developments and Other Ventures Nonutility Property Escrow Deposits for Decommissioning Nuclear Plants Other Deposits Total 1986 1985 (Thousands of Dollars) $38,299 17,088 13,477 20,278 560 $89,702 $44,743 15,433 13,931 12,563 1,000 $87,670 In 1986 the Company's investment in gas exploration and development joint ventures exceeded the full cost limitation ceiling by $7.2 million, which was charged to expense. 12.Leases Leased property included in Utility Plant at December 31 Nuclear Fuel Electric Plant Common Plant Gross Leased Property Accumulated Amortization Net Leased Property 1986 1985 (Thousands of Dollars) $484,536 $445,699 10,953 48,342 156 3,116 495,645 497,157 (214,299}

(159,016)

$281,346 $338,141 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totaled $65.6 million, <§> $60.9 million, and $39.l million for the years ended December 31, 1986, 1985 and 1984, respectively.

Other operating expenses include interest on capital lease obligations of $16.4 million, $18.2 million and $22.0 million in 1986, 1985 and 1984, respectively.

During 1986, $40.0 million of electric plant held under capital lease was retired and the lease terminated.

Minimum future lease payments as of December 31, 1986, are: Year Ending December 31 1987 1988 1989 1990 1991 Remaining years Total Minimum Future Lease Payments Imputed Interest (rates ranging from 6.5% to 17%) Present Value of Net Minimum Future Lease Payments Capital Leases $ 89,396 78, 151 71,629 48,418 30,522 13,185 $331,301 (49,955) $281,346 Operating Leases (Thousands of Dollars) $ 33,856 31, 170 31,477 30,596 29,801 97,407 $254,307 Total $123,252 109,321 103,106 79,014 60,323 110,592 $585,608 Rental expense under operating leases totaled $54.0 million, $43.9 million, and $29.2 million, in 1986, 1985 and 1984, respectively.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

-Continued

13. Segment Information

-Continuing Operations Electric Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Gas Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Identifiable Assets (') Electric Gas Nonallocable Assets Total Assets 1986 $ 2,699,365 1,966,004 206,701 $ 526,660 $ 753,232 $ 391,504 337,287 15,867 $ 38,350 $ 35,053 $ 8,811,304 416,824 1,519,892

$10,748,020 1985 1984 (Thousands of Dollars) $ 2,516,191

$2,435,731 1,974,222 1,858,505 168,208 162,959 $ 373,761 $ 414,267 $ 793,195 $1,022,496

$ 428,984 $ 462,966 375,399 413,938 14,841 13,474 $ 38,744 $ 35,554 $ 32,896 $ 30,613 $ 8,885,738

$8,412,532 407,375 405,958 718,732 737,239 SI0,011,845

$9,555,729

'Includes Utility Plant less accumulated depreciation, inventories and allocated common utility property.

14. Commitments and Contingencies The Company has incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be $1.2 billion for 1987 and $3.3 billion for 1988-1990.

These estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other appropriate factors. Facilities under construction and to be constructed, particularly Limerick Generating Station and associated facilities, will require permits and licenses which the Company has no assurance will be granted. The Price-Anderson Act places a "Limit of Liability" of $695 million for claims that could arise from an incident involving any licensed nuclear facility in the nation. All nuclear utilities, including the Company, have covered this exposure through a combination of private insurance and mandatory participation in a secondary financial protection pool. In the event of a nuclear incident, the Company could be assessed up to $13.5 million per incident, involving any licensed nuclear facility in the nation, with a maximum amount of $27 million in any one year. The current Price-Anderson legislation expires in 1987. Bills to amend the Anderson Act, including proposals to substantially modify or eliminate the limitation on liability provisions, have been introduced in Congress.

The Company maintains property insurance, including radiation contamination coverage, for loss or damage to its nuclear facilities.

Although it is impossible to determine the total amount of the loss that may result from an occurrence at these facilities, the Company maintains the maximum amount of insurance presently available, $1.2 billion for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $ 34 mi.Ilion for losses incurred at any plants insured by the insurance companies.

The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major outage at a nuclear station. The premium for this coverage is subject to an assessment for adverse loss experience.

The Company's maximum share of any assessment is $16 million. On March 29, 1985, the PUC adjusted the Company's February 28, 1985, Energy Cost Rate (ECR) filing to exclude S45 million of incurred fuel expense from ECR recovery pending an investigation into outages experienced at Peach Bottom Unit No. 2 and Salem Unit No. 1 in 1984. On February 28, 1986, the Company made its annual filing with the PUC for a revision in the ECR which requested a decrease.

On March 20, 1986, the PUC approved the Company's request to lower the ECR, effective April 1, 1986, and the PUC permitted the Companytorecover

$35.25 millionofthe S45 million fuel costs which the PUC had previously excluded from recovery.

The remaining

$ 9. 7 5 million was written off in the quarter ending March 31, 1986. OnJanuary 25, 1985, the PUC adopted an order granting the Company a net increase in annual revenues of $49 million reflecting the inclusion of Salem Unit No. 2 in rates. The Company agreed to guarantee

$116 million of fuel savings from Salem Unit No. 2 for the period from February 1, 1985 to March 31, 1986. Due primarily to a combination of lower than anticipated fuel prices and lower than anticipated generation from Salem Unit No. 2, the energy savings associated with the unit were less than the amount that the Company had guaranteed.

As a result, the Company wrote off $16 million of fuel expenses in the quarter ended March 31, 1986. In December 1981, the Company sold the federal income tax benefits associated with Unit No. 2 of the Salem Generating Station for $53,743,000 in a safe harbor lease transaction.

Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service claims which render the sale invalid. 15. Quarterly Data (Unaudited)

The Company's indemnification obligation also includes the payment of interest, at prime rates, on the indemnification amount and all associated costs of contesting an Internal Revenue Service challenge.

The Company has been advised that the Internal Revenue Service has asserted, in auditing the purchaser, that the sale was invalid. Although the purchaser has protested the Internal Revenue Service claims, the Company has no assurance that the protest will be successful.

If the Internal Revenue Service claims against the purchaser are upheld, compliance with the indemnification provisions of the agreement could result in a significant charge to income. The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts. Operating Revenues Quarter Ended 1986 1985 March 31 $868,635 $815,886 June 30 675,109 669,319 September 30 803,667 746,388 December 31 743,458 713,582 Earnings Applicable to Common Stock Quarter Ended 1986 1985 (Thousands of Dollars) March 31 $143,699 $128,422 June 30 105,964 96,212 September 30 146,441 101,569 December 31 79,255 108,521 1986 first quarter results include charges of approximately

$13.l million (net ofrelated incomes taxes) resulting from PU C's denial of recovery of approximately

$ 9. 75 million of replacement power costs and $16 million of unrecovered fuel expenses guaranteed (see note 14). Operating Income Net Income 1986 1985 1986 1985 (Thousands of Dollars) $124,446 $123,810 $166,261 $151, 166 92,179 97,763 128,213 118,859 183,081 94,962 168,705 124,163 165,304 95,970 103,141 131,113 Average Shares Outstanding Earnings Per Average Share 1986 1985 1986 1985 (Thousands) (Dollars) 177,843 162,859 $.81 $.79 181,378 168,723 .58 .57 185,171 171,993 .79 .59 188,037 175,401 .42 .62 1985 third quarter results include a charge of approximately

$ 34. 7 million (net of related income taxes) resulting from the PUC's denial of recovery of approximately

$73.0 million of energy costs. Operating Revenues and Operating Income for 1985 and the first three quarters of 1986 differ from the amounts previously reported due to the reclassification to discontinued operations of revenues and expenses associated with the sale ofsteam operations, as follows: Quarter Ended March 31 June 30 September 30 December 31 Operating Revenues Operating Income 1986 1985 1986 (Thousands of Dollars) $25,981 10,106 3,161 $36,413 14,200 4,516 13,400 $2,865 51 (1,948) 1985 $3,082 390 (1,722) 698 w Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

-Continued

16. Retirement Benefits The Company and its subsidiaries have noncontributory trusteed retirement plans applicable to all regular employees.

Pension costs include normal cost for the year and amortization of unfunded prior service costs over ten to twenty years. Approximately 83 % of such costs were charged to operating expenses and the remainder, associated with construction labor, to the cost of new utility plant. Retirement plan costs, which are funded as accrued, were $42,500,000, $46,700,000, and $42,000,000, in 1986, 1985 and 1984, respectively.

Pension plan data as of the dates of the most recent actuarial valuations is as follows: Actuarial present value of accumulated plan benefits Assumed rate of return Vested Nonvested Net assets available for benefits January 1 1986 1985 (Thousands of Dollars) 7.5% $580,815 7,127 $587,942 7.0% $512,639 60,990 $573,629 $854,917 $645,726 Changes in plan provisions, effective January 1, 1986, increased the actuarial present value of accumulated plan benefits by approximately

$30.6 million while the change in actuarial assumptions decreased the present value by $79.1 million. The actuarial methods and the accounting policies are the same as those used to determine pension expense for the prior year. The preceding tabular disclosures are required under applicable accounting principles.

However, the Company is of the opinion that comparing the actuarial present value of accumulated plan benefits with the net Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Philadelphia Electric Company assets available for benefits may be misleading.

The plan is of a long-term nature and is funded on a basis consistent with this concept. The actuarial value of accumulated plan benefits is, essentially, a hypothetical plan termination calculation which does not take into account future salaries or future service. Net assets, which are measured at fair value at January 1, are subject to fluctuations in the securities markets and, therefore, may not be indicative of the plan's long-term funded status. In December 1985, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 87, Employer's Accounting for Pensions.

This Statement supersedes existing accounting principles for defined benefit pension plans and becomes applicable to the Company in 1987. The Company believes adoption of Statement No. 87 will not have a material impact on its financial statements.

In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees.

Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based on the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing those benefits for approximately 3,400 retirees during the years 1986, 1985 and 1984 is not separable from the cost of providing benefits for approximately 10,000 active employees for the same period. Total premiums amounted to $31.6 million, $29.3 million, and $26.6 million, for 1986, 1985 and 1984, respectively.

We have examined the consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1987 Philadelphia Electric Company and Subsidiary Compan i es Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. 9 3/80 IO 3/80 11 2/83 Fitch Investors Service BBB 9/82 BBB-9/82 BB+ 9/82 Moody's Investors Service Baa3 1/83 Bal 1/83 bal 1/83 Standard & Poor's Corporation BBB-9/82 BB+ 9/82 BB+ 7/86 NYSE -Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1986 Fourth Third Quarter Quarter High Price $24 1/s $25 1/s Low Price $21 5/8 $19 7 18 Earnings 42¢ 79¢ Dividends 55¢ 55¢ Second Quarter $20 3/s $17 1/8 58¢ 55¢ First Fourth Quarter Quarter $201/2 Sl7% $16 7/s SI4 SH 62<r 55¢ 55<r RETURN ON AVERAGE COMMON STOCK EQUITY Percent 18 15 12 9 6 82 83 84 85 86 1985 Third Quarter Sl6% $14 59<r 55<r Second Firs t Quarter Quarter SI6Y8 Sl6% Sl3"Ve SI4Y.! 57<r 79<r 55<r 55<r RATIO OF EARNINGS TO MORTGAGE INTEREST limes Covered 3 .00 2.50 2.00 1.50 1.00 .50 82 83 84 85 86

<§> Philadelphia Electric Company and S ubsidiary Com p a ni es Financial Statistics Summary ofF.arnings (Millions of Dollars) For th e Year Ended 1986 Operating Revenues (for details see pages 42 and 43) $3,090.9 Operating Expenses Fuel and Energy Interchange 889.3 labor 417.2 Other Materials , Supplies and Services 475.2 Total Operation and Maintenance 1,781.7 Depreciation 222.6 Taxes 521.6 Total Operating Expenses 2,525.9 Operating Income 565.0 Other Income and Deductions Allowance for Other Funds Use d During Construction 76.8 Limerick Carrying Charges 188.7 Income Tax C redits , net 102.5 Other , net 2.4 Total Other Income and Deductions 370.4 Income Before Interest Charges 935.4 Interest Charges Long-Term Debt 458.9 Sho rt-Te rm Debt 12.5 Allowance for Borrowed Funds Used During Construction (101.6) Net Interest Charges 369.8 Income From Continuing Operations 565.6 Income From Discontinued Operations

1.9 Estimated

Loss on Disposal of Discontinued Operations (1.2) Net Income 566.3 Preferred Stock Dividends 90.9 F.arnings Applicable to Common Stock 475.4 Dividends on Common Stock 403.5 F.arnings Retained $ 71.9 Income From Continuing Operations Per Average Common Share $ 2.59 F.arnings Per Average Common Share (Dollars)

$ 2.60 Dividends per Common Share (Dollars)

$ 2.20 Common Stock Equity (Per Share) $ 18.47 Average Shares of Common Stock Outstanding (Millions) 183.1 1985 $2,945.2 1 , 09 7.8 370.8 440.1 1 , 908.7 183.0 440.9 2 , 532.6 412.6 1 76.3 133.4 (3.5) 306.2 718.8 43 5.4 17.7 (257.2) 195.9 522.9 2.4 525.3 90.6 434.7 373.5 $ 61.2 s 2.55 $ 2.56 s 2.20 $ 17.97 169.8 198 4 1983 198 2 1981 1976 $2,898.7 $2,524.9 $2,571.5 $2,358.5 $1 , 183.6 1 , 069.9 939.5 1 , 079.0 1 , 134.9 454.1 339.6 311.2 285.4 251.3 161.9 413.8 342.3 307.4 248.4 80.6 1 , 823.3 1 , 593.0 1 , 671.8 1,634.6 696.6 176.4 163.4 142.1 128.6 96.5 449.l 376.8 370.8 2 73.9 181.5 2 ,44 8.8 2,133.2 2 , 184.7 2 , 037.1 974.6 44 9.9 391.7 386.8 321.4 209.0 13 4.5 108.1 65.7 65.0 30.1 116.4 8 7.9 75.8 63.2 2 4.2 0.2 (3.1) (0.7) 2.5 2.6 251.1 192.9 1 40.8 1 30.7 56.9 70 1.0 584.6 527.6 452.1 265.9 4 02.5 330.2 308.9 266.7 1 47.6 30.9 35.2 32.0 33.2 3.6 (220.4) (167 .9) (147.6) (123.8) (47.5) 213.0 19 7.5 193.3 1 76.1 103.7 4 88.0 387.1 334.3 276.0 162.2 4.4 2.0 1.9 1.6 2.4 49 2.4 389.1 336.2 2 77.6 16 4.6 82.7 67.4 5 7.6 53.8 39.0 409.7 321.7 2 7 8.6 223.8 125.6 334.3 283.6 2 4 0.5 189.5 107.7 $ 7 5.4 $ 38.1 s 38.1 $ 34.3 $ 1 7.9 s 2.67 $ 2.39 s 2.38 s 2.23 s 1.88 $ 2.70 s 2.40 s 2.39 $ 2.2 5 $ 1.91 s 2.20 $ 2.12 s 2.06 $ 1.90 $ 1.64 $ 17.81 $ 17.99 s 17.93 $ 18.10 s 19.13 151.8 133.9 116.5 99.6 65.6

SUMMARY

OF FINANCIAL CONDffiON (Millions of Dollars) December 31 1986 1985 198 4 1983 1982 1981 1976 Assets Utility Plant, at original cost $11,216.7

$10,572.2

$9,834.1 $8,864.2 $7,905.7 $7,044.7 $4,747.2 Less: Accumulated Depreciation 2,014.7 1 , 824.4 1 , 726.3 1,592.0 1,450.1 1 , 330.6 860.3 Leased Property, Net 281.3 338.1 352.1 364.0 299.l 270.0 91.6 Net Utility Plant 9,483.3 9 , 085.9 8 ,4 59.9 7,636.2 6 ,7 54.7 5,984.1 3 , 978.5 Current Assets Cash and Temporary Cash Investments 90.7 188.8 30.4 57.2 50.0 30.7 23.8 Accounts Receivable 375.6 370.9 384.2 338.6 342.2 342.4 168.0 Inventories 129.7 123.7 150.5 131.1 143.0 132.2 88.3 Deferred Income Taxes -Energy Costs 44.8 (51.8) (117.7) (76.5) 43.3 17.0 (10.5) Other 78.6 71.8 137.0 52.3 40.2 35.l 20.8 Deferred Debits and Other Assets Unrecovered Revenue 112.5 Deferred Limerick Costs and Carrying Charges 195.6 Investments 89.7 87.7 80.9 99.4 91.4 77.8 13.2 Loss on Reacquired Debt 76.8 48.6 Other 70.7 86.2 82.9 80.4 24.9 31.5 14.7 Total $10,748.0

$10,011.8

$9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8 Capitalization and Liabilities Common Stock $ 2,833.0 $ 2,602.0 $2,361.0 $2,110.5 $1,826.2 $1,572.4 $1,002.8 Other Paid-In Capital 7.8 7.3 6.7 5.9 4.6 3.9 1.7 Retained Earnings 653.1 583.7 523.3 452.9 423.6 387.2 321.2 Common Shareholders' Equity 3,493.9 3 , 193.0 2,891.0 2 , 569.3 2,254.4 1 , 963.5 1 , 325.7 0 Preferred Stock: Without Mandatory Redemption 572.5 572.5 572.5 522.5 372.5 372.5 372.5 With Mandatory Redemption 374.9 318.3 326.2 284.9 292.3 266.9 162.6 Long-Term Debt 4,286.8 4,309.2 3,778.0 3,381.8 3,028.5 2 ,74 5.7 1 , 936.4 Total Capitalization 8,728.1 8,393.0 7,567.7 6 ,7 58.5 5,947.7 5,348.6 3,797.2 Current Liabilities Short-Term Debt 1.0 260.0 267.5 64.7 54.2 7.2 Long-Term Debt Due Within One Year 108.6 80.8 50.4 21.3 36.1 36.9 Lease Obligations Due Within One Year 69.4 76.3 68.3 61.5 32.5 53.9 10.6 Accounts and Dividends Payable 222.1 185.l 200.l 179.9 188.5 188.9 83.9 Taxes Accrued 86.1 58.5 40.3 25.8 65.9 68.4 20.2 Deferred Energy Costs 88.2 (101.7) (229.9) (149.3) 85.4 31.3 (19.9) Interest Accrued 90.7 93.0 91.1 91.8 99.8 82.3 43.2 Other 80.0 72.0 127.2 54.1 24.7 18.l 4.6 Deferred Credits and Other Liabilities Capital Lease Obligations 212.0 261.8 283.8 302.5 266.6 216.1 81.0 Deferred Income Taxes 695.0 502.6 373.3 346.5 290.5 273.5 110.8 Unamortized Investment Tax Credits 320.1 302.4 299.4 249.7 296.0 204.0 88.0 Other 47.7 87.0 76.4 130.2 106.1 75.4 33.1 Total $10,748.0

$10,011.8

$9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8

<*> Philadelphia Electric Company and Subsidiar y Companies Operating Statistics ELECTRIC OPERATIONS 1986 Output (Millions of Kilowatthours) Steam 7,864 Nuclear 17,125 Hydraulic 1,848 Pumped Storage Output 1,176 Pumped Storage Input (1,661) Purchase and Net Interchange 4,258 Internal Combustion 269 Other 382 Total Electric Output 31,261 Sales (Millions of Kilowatthours)

Residential 8,900 Small Commercial and Industrial 4,022 large Commercial and Industrial 15,068 All Other 993 Service Territory 28,983 Jersey Central Power and Light (Salem Unit No. 2) Total Electric Sales 28,983 Number of Customers, December 31 1985 9 ,4 55 8 ,3 59 1 ,4 84 1 , 235 (1 ,7 54) 10 , 252 178 1 , 254 30 ,4 63 8 ,4 40 3 ,7 31 14 , 920 1 , 044 28 , 135 28 , 135 Residential 1,263,465 1 , 245 ,4 81 Small Commercial and Industrial 127,797 124 ,7 19 large Commercial and Industrial 4,668 4,881 All Other 763 773 198 4 198 3 1982 1981 19 7 6 11 , 085 10 ,4 57 8,598 9 , 931 13 , 385 6 ,4 62 5 , 520 10 ,743 7,464 4,937 2,085 1 ,73 9 1,581 1 ,3 97 2 , 065 1 , 100 979 1 , 126 1 , 101 1 , 062 (1 , 579) (1,427) (1,665) (1,624)

(1,506) 11 , 975 12,181 11,120 11 , 173 7,666 425 491 178 283 792 528 36 31 , 553 29,940 31,681 30 , 253 28 ,4 37 8,515 8 ,4 67 7 , 877 8 , 014 7,585 3 , 543 3,284 3,142 3 , 115 2 , 755 14 , 881 14 ,47 8 14 , 178 14,916 14 , 662 1 , 061 1 , 003 1 , 012 1 , 005 1 , 271 28,000 27 , 232 26 , 209 27 , 050 26 , 273 1 , 395 346 3 , 352 1 , 218 29 , 395 27,578 29,561 28 , 268 26,273 1 , 230 , 883 1 , 217 , 635 1 , 206,944 1 , 200,238 1 , 137,544 121 , 676 119,292 118,407 117 , 016 115 , 422 5 , 100 5 ,437 5 , 616 5 ,7 90 5 ,7 47 751 751 762 746 2 , 345 Total Electric Customers 1,396,693 1 , 375 , 854 1 , 358 ,4 10 1 , 343 , 115 1 , 331 , 729 1,323,790 1 , 261 , 058 Operating Revenues (Millions of Dollars) Residential

$1,023.6 $923.9 $854.9 $744.0 S694.4 s643.7 $373.2 Small Commercial and Industrial 437.0 388.7 360.2 316.6 310.6 285.9 149.3 large Commercial and Industrial 1,103.3 1,061.8 1 , 008.5 877.4 922.3 917.1 442.9 All Other 135.5 141.8 145.1 139.4 118.3 109.5 59.4 Service Territory 2,699.4 2,516.2 2 , 368.7 2 , 077.4 2 , 045.6 1,956.2 1 , 024.8 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 135.4 45.9 Total Electric Revenues $2,699.4 $2 , 516.2 $2 ,4 35.7 $2,107.9 $2 , 181.0 $2,002.1 Sl , 024.8 Operating Expenses (Millions of Dollars) Operating expenses excluding depreciation

$1,966.0 Sl , 974.2 $1 , 858.5 Sl,592.0 $1 , 688.4 S 1,586.5 $750.2 Depreciation 206.7 168.2 163.0 150.9 130.2 117.3 88.0 Total Operating Expenses $2,172.7 $2 , 142.4 S2 , 021.5 Sl,742.9 Sl , 818.6 Sl , 703.8 S838.2 Electric Operating Income (Millions of Dollars) $ 526.7 s 373.8 s 414.2 s 365.0 s 362.4 s 298.3 $186.6 Average Use per Residential Customer (kilowatthours)

Without Electric Heating 6,177 6,034 6 , 160 6 , 319 5 , 875 6,022 6,298 With Electric Heating 16,661 15,923 17 , 293 16 , 523 16,813 18,054 22 , 154 Total 7,097 6,820 6,960 6 , 990 6,544 6,699 6,710 Electric Peak Load , Demand (thousands of kws) 6,134 6 , 034 5 , 925 5 , 879 5 , 691 5 ,7 31 5 , 346 Net Electric Generating Capacity -Year End Summer rating (thousands of kws) 7,870 7,599 7 , 765 7 , 974 8,006 8,006 7 , 742 Cost of Fuel per Million Btu $1.18 Sl.72 $2.22 $2.25 Sl.57 $2.10 Sl.24 Btu per Net Kilowatthour Generated 10,844 10,843 10 , 920 10,906 10 , 918 10 , 930 10,529 GAS OPERATIONS 1986 Sales (Million s of Cubic Feet) Residential 1,856 House Heating 25,731 Commercial and Industrial 33,834 All Other 578 Total Gas Sales 61,999 Gas Transported for Customers 3,907 Total Gas Sales & Transported 65,906 Number of Customers, December 31 Residential 68,590 House Heating 225,010 Commercial and Industrial 24,884 Total Gas Customers 318,484 Operating Revenues (M illions of Dollars) Residential

$ 18.0 House Heating 189.8 Commercial and Industrial 177.7 All Oth e r 2.0 Subtotal $387.5 Other Revenues (including Transported for Customers)

4.0 Total

Gas Revenues $391.5 Operating Expenses (Mi lli on s of Dollars) Operating expenses excluding depreciation

$337.3 Depreciation 15.9 Total Operating Expenses $353.2 Gas Operating Income (Millions of Dollars) $ 38.3 1985 1984 1983 1,810 1 ,941 2,168 23 , 227 25 ,4 29 22 , 981 36 , 254 41, 1 45 39 , 043 1 , 209 1 , 282 672 62,500 69 ,7 97 64 , 864 10 , 262 3,794 789 72 ,7 62 73,591 65,653 69 , 632 70,794 72,501 217,840 211,984 206,443 24 , 234 23,442 22 ,810 311,706 306 , 220 301 ,7 5 4 $ 18.7 s 19.0 185.4 191.7 214.1 243.7 5.2 5.6 $423.4 $460.0 5.5 3.0 $428.9 $463.0 $375.4 S413.9 14.8 13.5 $390.2 $427.4 $ 38.7 s 35.6 ELECTRIC SALES (including Salem Unit fllo. 2) Billions of kil owanhours 30 s 19.1 165.8 227.3 3.0 $415.2 1.8 $417.0 $377.6 12.7 $390.3 $ 26.7 82 83 84 85 86 -Salem Uni 1 No. 2 Sales 1982 1981 1976 2,442 2,446 2 ,34 2 24 , 237 24,675 24 , 540 41,660 45,670 33,390 422 127 89 68,761 72,918 60 , 361 68,761 72 , 918 60 ,3 61 76,638 78,426 89,459 198 , 910 193 , 038 162,993 22 , 324 21,578 19,669 297,872 293,042 272,121 s 18.1 s 15.4 s 8.7 147.1 128.5 73.3 221.1 209.7 76.1 1.8 0.5 0.2 $388.1 $354.1 $158.3 2.3 2.3 0.6 $390.4 $356.4 $158.9 S354.l $322.0 s 128.1 11.9 11.3 8.4 $366.0 $333.3 S136.5 $ 24.4 $ 23.1 s 22.4 GAS SALES & TRANSPORTED Billionsof Cub i c Fee1 90 75 60 30 15 82 83 84 85 86 <E>

Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings Most PE Securities are listed on the New York Stock Exchange and the Philadelphia Stock Exchange.

Philadelphia Electric Power Company Debentures are listed on the Philadelphia Stock Exchange. Dividends The Company has paid dividends on its common stock continually since 1902. The Board of Directors normally con s iders common stock dividends for payment in March , June , September and December.

The Company estimates that the $2.20 per share dividend paid to common shareholders in 1986 is full y taxable as dividend income for Federal income tax purposes. Dividend Reinvestment and Stock Purchase Plan Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service fees. Customers of the Company who are not shareholders ma y enroll in the plan by making a one-time purchase of common stock directly from the Company. All shareholders have the opportunity to invest additional funds in common stock of the Company , whether or not they have their dividends reinvested

-also with all fees borne by the Company. Over 34 % of the Company's common shareholders were participants. In 1986 , they invested more than $100 million through the Plan , including cash payments. Information concerning this Plan may be obtained from D. P Scott , Treasurer , Philadelphia Electric Company , 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101. Comments Welcomed The Company always is pleased to answer questions and provide information. Please address your comments to Mrs. L. S. Binder, Secretary , Philadelphia Electric Company , 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101. Inquiries relating to shareholder accounting records , stock transfer and change of address should be directed to Philadelphia Electric Company , 2301 Market Street , PO. Box 8699, Philadelphia , PA 19101 , Attn: Stock Transfer Section , S6-4. Toll-Free Telephone Line Toll-free telephone lines are available to the Company's shareholders for inquiries concerning their stock ownership.

When calling from outside of Pennsylvania , call 1-800-223-7326. From within Pennsylvania, call 1-800-242-7326. Local Philadelphia calls should be made to 841-5795. Annual Meeting The Annual Meeting of the Shareholders of the Company will be held on April 8 , 1987 , at 10:30 A.M. at the Pennsylvania Hall Auditorium , Philadelphia Civic Center , 34th Street & Civic Center Boulevard , Philadelphia, PA. Common stock shareholders of record at the close of business on February 27, 1987 , are entitled to vote at this meeting. Notice of the meeting , proxy statement , and proxy will be mailed under separate cover. Prompt return of the proxies will be appreciated. FormlO-K Form 10-K, the annual report filed with the Securities and Exchange Commission , is available , without charge , to shareholders upon written request to Philadelphia Electric Compan y, 2301 Market Street , PO. Box 8699 , Philadelphia , PA 19101 , Attn: Financial Division , S21-1. Shareholders The Company has 294 , 715 shareholders of record of common stock , an 11% increase in 5 years. Transfer Agents and Registrars PHILADELPHIA ELECI'RIC COMPANY -Preferred and Common Stocks Registrars

Mellon Bank (East) N.A. Transfer Agents: Four Mellon Bank Center Philadelphia , PA 19102 Morgan Shareholder Services Trust Co. 30WBroadway,NY,NY10015 Philadelphia Electric Company 2301 Market St., Phila., PA 19101 Morgan Shareholder Services Trust Co. 30WBroadway,NY,NY10015 PHILADELPHIA ELECI'RIC COMPANY -First and Refunding Mortgage Bonds Trustee: Fidelity Bank , National Association Broad & Walnut Sts., Phila., PA 19109 New York Agent: Morgan Guaranty Trust Co. of NY, 30WBroadway

, NY,NY10015 PHILADELPHIA ELECI'RIC COMPANY -Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary)

-Debentures Trustee: The Philadelphia National Bank , New York Agent: General Office: Broad & Chestnut Sts., Phila., PA 19101 Irving Trust Co., One Wall Street , NY, NY 10015 2301 Market Street, PO. Box 8699 , Phila., PA 19101. (215) 841-4000.

Directors

'John H. Austin , Jr. Pr e sid e nt and Ch i ef Operating Officer of the C ompan y William T. Coleman , Jr., Es qu ire Senior Partn e r of the law firm of O'Me l ve n y & Myers M. Walter D'Alessio Pr e siden t and C hief Executive O.fficei; Latim e r & Buck , In c. (Mortgage Bankin g and Real E state D e ve l opm e nt) 'James L. Eve r ett Chairman of the Board a n d Chief Executi ve Officer of the Company Willi a m S. Gaithe r Pr e s i dent , Dr ex e l U niversity

'Rob e rt F. Gilkeson C hairman of the Executive Commi tt ee o f th e Co mpany Ric h ar d G. G ilm o r e Seni o r Vice President , Finance and C hi e f Financia l Officei* of t he Co mpany 'Rob e rt D. Harrison Vi ce C hairman , john Wanamaker, Phi l ad e l phia (M e rchandisin g) Paul R. Kais e r C hairman Emeritus , Tasty Baking C ompany (Diversified Manufac t ur i ng) 'Jo s eph C. Ladd C hairman and Chief Executive Officer, Fid e lity Mutual Lif e Insuran c e Co mpan y Ed i t h e]. Levit , M.D. Pr e sident Em e ritus and Vice C h airman of the Board , Nationa l Board of Medica l Exam i ners 'Josep h]. McLa u g h l i n President and Chief Exec u tive Officer, B e neficial Mutua l Savings Bank Director Change: William S. Fi s hman's term expi r e d March 31 , 1 9 86 *Member of t he Execu ti ve Commi tt ee Officers James L. Eve r e tt C hairman of the Board and C hi e f Executive Officer Joh n H. A u stin , J r. President and Chief Operatin g Off i cer Richard G. Gi l more S e nior Vic e Pr e sid e nt , Financ e and C hi e f Financial Offic e r J o hn S. Kemper S e ni o r Vice Presiden t , Engineer i ng and Produc t ion Edward G. Ba u er , J r. Vice P r esident and Genera l C ounsel C l ifford Bren n er Vic e Presiden t , Corporate Co mmunica t ions Charles L. Fritz Vice P r esid e nt , Personne l and I ndustria l Re l at i ons Josep h W. Ga ll ag h er Vice P r es i den t , N u c l ear Opera t ions Ra y mon d F. Ho lm a n Vic e President , Genera l A dminis t ra t ion S. Jo s eph Kowalski Vic e President , E n gin e ering and R esea r c h Kenne th G. Law r e n ce V i c e P residen t , Commerc i a l Opera ti ons Albert G. M i ka l a u s k as Vice President , Electr i c Transmission and Distribution Phi l ip G. M ulli gan Vice Presiden t , Gas Operations A. Lewis P a rr y , J r. Vic e Presiden t , Pu rchasing and Genera l Serv i ces Morton W. Rimerman Vi ce Presid e nt , Financ e and A c c ounting Al v in]. Weigand Vice Pres i dent , E l ectr i c Produc ti on Raymon d C. Wi lli a.ms Vic e Pres i de nt , R a t es O ffic er s L u c y S. B in de r Secretary D o n a ld P Scott Treasurer Ja m es D. L ync h Assis t ant S ec r e tar y ]. R obert Causto n Assistant Tr e asur e r J o n A. Kath e rine Ass i stant T r eas u rer W illi a m M. Le nn ox.J r. Ass i s t an t Treasure r Ma n agemen t Change s: On Apr i l 28 , 1986 , th e Fi n ance an d Account i ng Dep a r tment was r e aligned as fo ll ows: Ri c h ard G. G il mo r e was elec t ed Se n ior Vice Presi d e nt , Fi n ance an d Chief F i na n c i a l Office r Morto n W. Ri me rm a n was elec t ed Vice P res id e nt , Fina n ce a nd Acco unti ng Ray m o nd C. Wi lli a m s was elec t e d Vice Preside nt , Ra t es Don a l d P Scott was e l ecte d Treasurer Josep h F. P aq u e tt e , Jr. t e nd ered his resig n a t ion as V i ce Pres i dent , F i nance and Accounting , effec t ive Apri l 30 , 1986. O n May 23 , 1 986 , Albert G. M i ka l a u skas was el ecte d Vice P resi d e nt , Tra n s m iss i o n a nd D i s tributi o n , s u cceed ing T h o m as W. Coppoc k , who ret ir ed Ju ly 1 , 1 986. O n Nove m ber 2 4 , 1 986 , th e Engineering and R esearch and E l ectric Production Departme n ts wer e re a ligne d as fo ll ows: Jo hn S. Kempe r was electe d Se ni o r V i ce P res id ent , Engi n eering an d Prod u ct i on J osep h W. Ga ll ag h e r was elected Vi c e Pr es i d e nt , N ucl ea r O p era ti o n s S.Jose ph Kowa l s ki was ele ct e d V i ce P r es id ent , E n g in ee r i ng a nd R esea r c h Alv in). We i gand was electe d Vice Pres i dent , E l ectric Prod u ct i on Vincent S. Boyer , Senior Vice President , N u clear Power , and Shields L. Da l troff , V i ce Pr esident , E l ec tri c Pro du c t ion , re ti re d Ma r c h 1 , 198 7. O n Nove m be r 2 4 , 1986 , K enne t h G. Law r e n ce was e l ected V i ce Pr esi d e nt , Co mm e r c i a l O p era ti o n s, s u ccee d i ng W illi am B. Mo rl o k , w h o r e t i r ed Fe bru a r y 1 , 1 987.

Philadelphia E l ec tri c Compa n y 230 1 M a rk et Street PO B ox 8699 Phil ade l p hi a PA 1 910 1 BULK RATE U.S. POSTAGE PAID Philadelphia PA Permit N o. 378